The fourth meeting of the G-20 heads of government since the beginning of the global economic crisis takes place in Toronto over the weekend. Amazingly enough, a year and a half after the first meeting in December 2008, the leaders will still be discussing crisis rather than recovery. In fact, the very medicine that the G-20 had readily agreed to administer in a coordinated fashion in 2008?fiscal stimulus?is now the major bone of contention. There is a group of countries led by the US, and India would broadly fall into this group, who believe that since recovery is still fragile, stimulus must continue for a while longer. Otherwise the world may be in danger of experiencing a double-dip recession. Barack Obama is already on record saying that reining in public finance should be a medium-term objective, not a short-term one. On the other side of the debate are the European countries that are reeling under massive fiscal deficits and huge debt burdens that have brought some of them?the infamous Pigs?dangerously close to the prospect of sovereign debt defaults. But even traditional powerhouse economies like Germany and the UK are being forced into making drastic cuts in spending at this very moment. The problem is that it is difficult to tell which of the two alternative outcomes in Europe will be worse for the global economy?sovereign debt defaults by some or a tight fiscal squeeze by all that may in the short run take a toll on growth in Europe and hence, by transitivity, the rest of the world?
The major European economies seem determined to carry out serious cuts with the view that short-term pain will eventually yield to gain in the medium term. That is probably the sensible option?sovereign debt defaults could set off an uncontrollable contagion, like the collapse of Lehman did, sending the global economy into a deep double-dip recession. On the other hand, a prolonged period of slow growth in Europe as a result of spending cuts is unlikely to impact the rest of the world in the same way. Sure, those countries that export to European markets will suffer. But it may be worth paying that price to prevent another round of panic. Interestingly, China managed to deflect the attention from itself, ahead of the summit, by committing to a revaluation of the yuan. That leaves the focus on Europe and the US. And the debate on financial regulation may yet have to wait for another meeting.
