G20: Paving the way for a new Great Depression?

World leaders have pledged to slash the government deficits of industrialized countries by half over the next three years. Is that goal, set at the just-concluded G20 summit in Toronto, fiscal prudence – or the prelude to the next Great Depression?

Paul Krugman believes it’s the latter. In a widely read Monday New York Times column, the Nobel Prize-winning liberal economist writes that he fears the world is in the early stages of a third depression, an economic downturn as dire as the years that followed the Panic of 1873 or the Great Depression of the early 20th century.

The problem, according to Mr. Krugman, is that governments are obsessing about inflation and debt when the real threat is deflation and unemployment. The world does not need more belt-tightening, he writes. It needs more stimulus programs.

“The real problem is inadequate spending,” writes Krugman.

That’s not the way European leaders see things. German Chancellor Angela Merkel and others see budget retrenchment as the industrialized nations’ top priority. Otherwise, they feel, the world risks spending itself into insolvency, and credit crises won’t be limited to Greece, Spain, and other nations on the periphery of the Euro zone.

The goals set at the just-concluded G20 summit in Toronto are not exactly a return to Herbert Hoover-style austerity, point out other analysts. There is enough wiggle room in the wording of the agreement for nations to go their own ways, within limits.

The G20 endorsed a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross national product by 2016. But the goal was expressed as an expectation, not a firm deadline. And the final communiqué said deficit reduction would be “tailored to national circumstances.” In other words, the US and other nations still have the flexibility to implement vastly different national policies.

“The communiqué produced by the G20’s Toronto summit on June 27 mustered all the blandness that is typical of such documents,” writes Sebastian Mallaby, a senior fellow for international economics at the Council on Foreign Relations, in an analysis of the summit’s outcome.

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