Another G20 summit meeting has come and gone. The heads of the eight leading industrialized nations, the G8, met first on Friday and Saturday, followed by the full G20 complement, representing the twenty most important global economies.
The primary agenda for this summit was the global financial system and the world economy. Throughout the meetings, pronouncements of shared financial goals and economic cooperation were so frequently and publicly communicated as to become cliche, …not entirely unexpected for these kinds of events.
Was meaningful progress made and consensus achieved? It’s too early to tell (see a brilliant version of the communique in the Wall Street Journal, annotated by Marc Chandler, Simon Johnson, and Arvind Subramanian).
The desire for coordinated action on the global financial system and agreement on fiscal policy is certainly admirable, but the fact remains that each nation faces a differing domestic situation, and uneven economic and political pressures at home. Considering their differences, the fact that any consensus could be reached, let alone communicated, must be considered an accomplishment.
However, the most interesting storyline of the meetings was the tension between U.S. and European approaches to fiscal policy: spending versus austerity.
The U.S. position has always been that “pulling back spending too quickly could choke off the economic recovery.” On this count, Obama’s entreaties were acknowledged, “We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today. In short, we have to do everything in our power to avoid a repeat of the recent financial crisis.” Meanwhile, agreements on targets for getting economic deficits under control, credibly committing to reducing deficits in the medium-term, and pledging to cut them in half by 2013, appeased European austerity proponents.
Although the gathering did not produce a uniformly agreed-upon fiscal solution, the consensus achieved could be described as one of “broad commitment to sensible long-term austerity.” Basically, participants agreed to ease into austerity – with some advocating for a quicker pace than others, …and plenty of room for individual interpretation.
At the end of the day, growth is the primary challenge for struggling economies around the world. Renewed growth will lead to increased tax revenues and the cash flow necessary to curb deficits, and ultimately, pay down debt. Although aggressively reducing government spending and increasing taxes seem intellectually appealing as solutions to deficit problems, reducing unemployment will be a real challenge for those countries that adopt austerity measures too soon. At the end of the day, the mechanism through which painful near-term austerity measures will increase employment and foster growth remains unclear, and threatens to derail whatever fragile economic recovery is currently underway. So countries with no immediate market-mandated need to impose austerity ought tread carefully.
Regardless, the paths to which the U.S. and its European counterparts have committed will, in the end, provide ample opportunity to observe, and debate, the long term economic consequences of their divergent fiscal approaches.
Parts of this opinion piece were co-written with Tom Cleveland, market analyst at Forex Traders, and I thank Tom for his contributions.