This weekend?s G-20 summit in Toronto arrives at a juncture when the global economy that was assumed to be on a faint recovery path is now undergoing on-off palpitations over sovereign debt crises in the euro zone and beyond. The severe austerity measures tabled by new governments in the UK and Japan just before the summit outlined the delicacy of the moment, where a contradiction has developed between stimulating growth through Keynesian pump-priming and keeping governments solvent and creditworthy.
This discrepancy is captured in the draft communiqu? of the latest summit released as a preview to Reuters. It performs a juggling act of cautioning against ?complacency? since recovery is ?uneven and fragile?, while acknowledging that ?fiscal challenges could seriously threaten the recovery and weaken prospects for long-term growth?.
The speed and synchronisation with which the world?s 20 major economies should exit emergency state spending that is propping up demand and employment will preoccupy attendees at Toronto. US President Barack Obama?s pre-summit letter to G-20 colleagues took the position that ?sustainable public finances? should be a goal for the entire group only in the ?medium term?.
But across the Atlantic, where state profligacy has forced many a country to undertake painful cost cutting sprees, Obama?s message did not go down well. British Prime Minister David Cameron?s spokesman counter-argued that ?the implementation of fiscal policy needs to reflect the particular circumstances of the countries concerned?.
German Chancellor Angela Merkel, who has just unveiled state savings policies worth $98 billion, disclosed that she had telephoned Obama and ?told him how important budgetary consolidation was?. The Brussels-based European Union bureaucracy has authored its own letter ahead of the Toronto meeting, calling on all G-20 members to begin ?substantial fiscal consolidation? from 2011.
According to an inside scoop by AFP, European policymakers find it particularly embarrassing that the US, Canada and ?other rivals want to place Europe?s debt crisis at the heart of the G-20 summit?. EU officials are petulantly displaying statistics that the average debt-to-GDP ratio in their common market is 84%, compared to 102% in the US. Annual public deficits, say exasperated EU economists, are 6.3% for the EU but 12% in the US. Part of the hullabaloo about pacing stimulus withdrawals is thus an ego question as to whose finances are really parlous, notwithstanding the fact that global investors worry less about American sovereign debt than about the European one.
A related issue that portends disagreement at Toronto is the G-20?s old pledge of promoting ?balanced global demand?, whereby member states with healthy trade balances and foreign exchange reserves would enhance domestic sources of consumption. Obama?s letter expressed frustration about ?continued heavy reliance on exports by some countries with already large external surpluses?. Given that China has already won praise from the Obama administration for orchestrating a shift towards domestic consumption, this barb was interpreted as an attack on Germany, the world?s second largest exporter. Merkel defensively retorted that her government ?cannot influence the exporting power? of German industry.
G-20 leaders can agree to a modus vivendi of ?differentiated exit? from stimulus spending, but differentiated and complementary economic growth strategies will be much harder to achieve.
Domestic interest constituencies of member states will not easily allow their leaders to negotiate international agreements that might be for the larger good of a worldwide recovery, but which entail painful adjustment costs within each country. If China and Germany are to become less export-dependent and more open to imports from the US and other countries, the impetus has to come from cost-benefit calculations of powerful actors inside their polities. The demand balancing dispute among G-20 members is a classic exposition of the limits of multilateral problem solving.
As with every other issue before the G-20, the EU and the US? proposed global levy on banks shows how states speak differently owing to their respective varied internal economic structures and conditions. The debt-plagued Europeans have assumed the lead in trying to push a uniform level of tax on banks of all member countries towards a contingency fund for future bailouts of financial firms. The US is on board because the Obama administration has taken flak for sacrificing American taxpayers? money to extricate Wall Street sinners.
But G-20 member states that have not needed bailouts for their banks are firmly opposed to a uniform global levy that, however small in percentage terms, would punish their financial sectors for no fault. India, Japan, Brazil and Canada have refused to concede unfair liabilities on their relatively better regulated banks. Economist Eswar Prasad, who advises the Indian government, criticised ?an uneven playing field because developing-nation banks are becoming a larger part of the global system?. He implied that a hidden competitiveness-killing motive lies behind the mooting of a global bank tax by some advanced economies.
Similar alertness not to give any ground that slows down or reverses the momentum of emerging economies is driving the Chinese approach to the Toronto summit. Chinese state media outlets covering the Toronto summit are exuding pride that the share of emerging economies in total world output is increasing at the cost of G-7 nations and that this is one more indicator of shifting economic power.
The next G-20 summit scheduled in South Korea could occur when the transition of economic gravity from West to East speeds up, adding to the coordination and harmonisation difficulties that already exist. We are yet to witness a head-on collision at the G-20 on the lines of, say, BRIC vs G-7, but it could be on the cards in future summits as the former countries wax in power simultaneously as the latter wane.
The author is associate professor of world politics at the OP Jindal Global University