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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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.Skip to next paragraph
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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on EU leaders to rethink cuts, and to “learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.”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.”
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