G20 summit: an economic clash of civilizations

This weekend's G20 summit pits President Obama's stimulus efforts against European calls for austerity budgets in what is shaping up as an economic clash of civilizations.

This weekend's G20 summit is shaping up as an economic clash of civilizations – or at least a clash of EU and US economic views.

EU officials led by German chancellor Angela Merkel are on a national “austerity” budget cutting offensive as the wisest policy for economic health, ahead of the Toronto summit of 20 large-economy nations.

Ms. Merkel Thursday said Germany will continue with $100 billion in cuts that will join similar giant ax strokes in the UK, Italy, France, Spain, and Greece. EU officials say budget austerity promotes the stability and market confidence that are prerequisites for their role in overall recovery.

Yet EU pro-austerity statements in the past 48 hours are also defensive – a reaction to public statements from US President Barack Obama and G20 chairman Lee Myung-bak, South Korea's president, that the overall effect of national austerity in the EU will harm recovery. They are joined by US Treasury Secretary Tim Geithner, investor George Soros, and Nobel laureate and columnist Paul Krugman, among others, arguing that austerity works against growth, and may lead to a recessionary spiral.

“If European countries proceed with their fiscal austerity plans, the global economic turnaround may slow down,” said Mr. Lee, in an interview with the Toronto Globe and Mail.

Merkel’s austerity leadership comes at a time when the German chancellor is facing a crisis in her ruling coalition. Her partner, the free-market Free Democrats, are still calling for tax cuts, and German voters are disgruntled that Merkel finally agreed to a Greek bailout of $145 billion, and a $1 trillion reserve bailout fund in early May designed to halt the fall of the euro and investor confidence. German growth in the past year is already adding to global recovery, Merkel said yesterday.

The pre-G20 pro-austerity forces include Jean-Claude Trichet, head of the European Central Bank saying, “the idea that austerity measures could trigger stagnation is incorrect,” and German Finance Minister Wolfgang Schauble saying, "Governments should not become addicted to borrowing as a quick fix to stimulate demand…. Deficit spending cannot become a permanent state of affairs."

French Finance Minister Christine Lagarde told Les Echoes somewhat neutrally that while each government may be taking different approaches, “we all have this imperative to restore our public finances.” The word “austerity” in France is a non-starter, politically, but France has initiated some $55 billion in reductions over three years.

Yesterday, the Elysees Palace said it would not hold a traditional Bastille Day garden party – last year’s cost was about $900,000 – for the first time since the French Revolution, underscoring the cost-cutting climate.

President Obama last Friday called on EU leaders to rethink cuts, and to “learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.”

Eurozone budget rules

Under Euro-zone rules, national expenditures should not exceed 3 percent of GDP, and public debt should not exceed 60 percent. That these rules are routinely set aside can’t continue, EU officials say, with actuarial tables showing more pensioners. Public concern that sovereign debt could put states on the brink of collapse has led to acceptance of austerity plans, even in states with socialist governments like Spain and Portugal.

A column by Mr. Krugman that criticizes German officials for lack of content and bottom-line numbers for an austerity policy – where “Suddenly, creating jobs is out, inflicting pain is in” – rejoins the difference, and had terrific impact in Germany. Krugman argues cuts designed to adjust for an aging population don’t add up: “Even if you manage to save 80 billion euros – which you won’t, because the budget cuts will hurt your economy and reduce revenues – the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.”

Mr. Soros, the billionaire Hungarian-born investor-philanthropist, said in Berlin this week the “social unrest” Germany deeply fears from inflation is more likely to come through coordinated cuts: "When all countries are reducing deficits at a time of high unemployment they set in motion a downward spiral…even if budgetary targets were met, it is difficult to see how weaker countries could regain their competitiveness and start growing again… the adjustment process would require reductions in wages and prices, producing deflation."

Europeans also argue with some exasperation that the EU can’t print money in the way the US can, and that they are addressing deficit problems today that the US will have to face later.

Rym Ayadi, senior fellow at the Center for European Policy Studies in Brussels, agrees that the US analysis of stunted growth is correct, but also feels EU states are compelled to cut anyway. “Unemployment is more than 10 percent in many countries, in Spain it is 20 percent,” Ms. Ayadi says. “We see social forecasts in which this may not improve, which means lower revenue in five years. There could be another Greece. Yes, I agree with the US there will be an impact on global recovery. But [EU nations] have no other choice.”

Related:

• World debt crisis: eight reasons you should care
• Can the European Union survive the debt crisis? Can the European Union survive the debt crisis?
• Germany news coverage