The G20 – Fiscal Austerity or Co-ordinated Recovery?

Further to my earlier post on the turn to fiscal austerity on the part of the IMF, OECD and G20, it increasingly strikes me that there is a fundamental contradiction between G20 goals going into the Toronto summit.

At Pittsburgh, the G20 called for a “Framework for Strong, Sustainable, and Balanced Growth.”

“We will need to work together as we manage the transition to a more balanced pattern of global growth…To put in place this framework, we commit to develop a process whereby we set out our objectives, put forward policies to achieve these objectives, and together assess our progress. We will ask the IMF to help us with its analysis of how our respective national or regional policy frameworks fit together… We will work together to ensure that our fiscal, monetary, trade, and structural policies are collectively consistent with more sustainable and balanced trajectories of growth.”

Put simply, the idea is that there in an onus on countries running large trade surpluses (especially China) to expand demand so as to allow chronic deficit countries (especially the US) to grow through exports rather than re balance through domestic austerity.

This approach is hard to square with the request from Prime Minister Harper that G20 countries come to Toronto with concrete plans to reduce deficits over the next few years, not to mention the lurch to austerity in Germany.

From the perspective of closing global balance of payments imbalances, both Germany and Japan (with current account surpluses of 6.0% and 3.3% of GDP respectively) should be expanding domestic demand so that the US and those Euro countries with current account and trade deficits can grow out of their balance of payment and fiscal problems.

But Germany and Japan are running significant fiscal deficits, currently running at 5.4% and 7.6% of GDP respectively. (All data are for 2010 from the statistical annex of the OECD Economic Outlook.)

Should Germany and Japan – which are, after all, major chunks of the global economy – expand or contract domestic demand?

The fiscal hawks – which now seem to include the IMF, the OECD and Canada – seem to be saying that they must cut to restore market confidence.

But both Germany and Japan can readily finance their deficits at home at low cost  (even with debt at 200% of GDP, Japan’s debt servicing costs are only 2% of GDP.)

There is a long-standing pattern for surplus economies like Germany and Japan not to assume responsibility for the stability of the global capitalist system as a whole. Traditionally, that task has been assumed by the US, playing the role of global consumer of last resort.

The question is – will the US come to Toronto with the message that they can no longer play that role and that the torch must be passed to an effective G20?     The Obama Administration seem to recognize that continued stimulus is needed to maintain the global recovery, but they cannot continue to deficit finance a global recovery from which the US domestic economy and US workers are excluded. And that is exactly what will happen if big players like Germany shift to domestic austerity and  are happy to see their currencies depreciate against the US dollar.

In short, there is a lot in play.