Transatlantic Clash at G20?

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Stuart Eizenstadt and Caio Koch-Weser correctly argue that it’s time for "a renaissance of joint economic and political leadership by the U.S. and the EU and its members" at tomorrow’s G20 Summit.   We won’t, however, be getting it.

Time‘s Leo Cendrowicz argues that the "an extraordinary austerity drive by European economies as they attempt to redress their public finances" has "alarmed the U.S." and the "rumbling row threatens to hijack the entire Toronto agenda."

U.S. officials say Europeans are choking off the recovery before it has even started. Obama has sent his own letter to G-20 leaders, asking them to "learn from the consequential mistakes of the past" when stimulus packages were withdrawn too early, and warning that excessive spending cuts by governments could lead to "renewed hardships and recession."

Ironically, the euro area’s overall fiscal situation looks healthier that that of the U.S. Considering the 16 euro-zone members as a whole, their budget deficit is expected to be about 6.5% of GDP and government debt 85% in 2010, but in the U.S., the deficit is at 10% of GDP while debt is at 116%. (The U.S. debt figure is the sum of federal, state and local government debt, which better corresponds to E.U. statistics.)

The conflicting approaches divide economists. Nobel Prize–winning economist Paul Krugman has been a trenchant critic of the sudden fiscal frugality, writing of the "utter folly" of "madmen in authority." UniCredit chief economist Marco Annunziata, however, says concerns over the austerity derailing the global recovery are vastly overrated, and that Europe should pursue more aggressive public-spending cuts. Meanwhile, 100 Italian economists put their names to a letter to business daily Il Sole 24 Ore warning that the austerity strategies risk tipping Europe into a self-feeding downward spiral, causing weaker countries to be catapulted out of the euro zone. Even within the E.U. there are differences, with Germany the most aggressive budget hawk, and the French bridling at Berlin’s hectoring. "If we add austerity to austerity, we are going into recession," Sarkozy said earlier this month.

"At a time when this crisis has shown how global our economies have become, policymakers are making decisions through a purely national prism," says Thomas Klau, who heads the Paris office of the European Council on Foreign Relations. "We are very far from seeing an intelligent coordination and are slipping towards a free-for-all. But then, it was always misguided to hope that the G-20 could become a permanent steering committee of the world economy."

CSM’s Robert Marquand terms the Summit "an economic clash of civilizations."   Of surprise to no one, of course, Germany is at  its center.  Spiegel:

Conflict, it would seem, will be everywhere in Toronto this weekend as world leaders gather for the G-20 summit to discuss possible reforms to the global financial system.


German Finance Minister Wolfgang Schäuble poured more fuel on the fire in a contribution published Friday in the business daily Handelsblatt. Referring to US demands that Germany abandon austerity in favor of additional economic stimulus measures, Schäuble said that "governments should not become addicted to borrowing as a quick fix to stimulate demand. Deficit spending cannot become a permanent state of affairs."


Schäuble’s remarks were just the latest in a trans-Atlantic back-and-forth that has continued all week. US President Barack Obama’s letter to G-20 leaders , in which he wrote, "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," kicked off the debate late last week. Most interpreted the line as a warning directed at Berlin.

In another piece, Spiegel adds:

Back in 2008 the G-20 leaders found it easy to agree on a response to the global economic crisis by assembling giant stimulus packages to restart growth and financial rescue plans for the frozen banking system. Now that financial meltdown has been averted and economies are tiptoeing towards renewed growth, divisions are opening up on how best to proceed.

Germany is not the only European country opting for saving over spending. The new government in London introduced a drastic budget on Tuesday aimed at tackling the deficit by cutting public spending and raising taxes.

On his way to Canada, new British Prime Minister David Cameron told reporters that "this weekend isn’t about a row over fiscal policy. We all agree on the need for fiscal consolidation. For me this G-20 is about putting the world economy on an irreversible path to recovery."

Yet it is unlikely that the summit will manage anything close to harmony. Merkel herself has admitted that she is expecting "controversial discussions."

One interesting development, however, is that the United States Congress has finally passed a significant financial regulatory package — overnight, in fact — which will, as BBC’s Mark Mardell notes, give President Obama "something to crow about" because at "the last G20, it was agreed that the world had to have new financial rules" and "this puts the US ahead of Europe."

But I’m not sure that will give him any substantial leverage on the stimulus versus restraint issue.   Not only are different political cultures at work, but Obama himself is facing incredibly strong pressure at home, with his party facing bleak odds in the November midterms, against another stimulus and going further into debt.

James Joyner is managing editor of the Atlantic Council. 

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