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.
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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.