G-20 an Amazing Success; Another Look at the Impossible

In relative terms, as economic summits go, the recent G-20 meeting was a spectacular success.

Unfortunately, one might not get that impression from the Bloomberg headline G-20 Coordination Fails as Governments Clash on Recovery Recipe.

Global policy makers are starting to clash over their individual prescriptions for recovery as Europe demands lower budget deficits while the U.S. warns against pushing exports instead of domestic demand.

At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5, Treasury Secretary Timothy F. Geithner said the world cannot again bank on the cash-strapped U.S. consumer to drive growth and urged other nations to stimulate their own demand.

Global policy makers are starting to clash over their individual prescriptions for recovery as Europe demands lower budget deficits while the U.S. warns against pushing exports instead of domestic demand.

At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5, Treasury Secretary Timothy F. Geithner said the world cannot again bank on the cash-strapped U.S. consumer to drive growth and urged other nations to stimulate their own demand.

The conundrum is that governments are all trying to harness a rebound in trade, which the Netherlands Bureau for Economic Analysis last week estimated grew 3.5 percent in March, more than double February’s pace.

Companies from French beverage maker Pernod Ricard SA to Japan’s Toshiba Corp. and Nissan Motor Co. are counting on foreign demand to stoke earnings.

In the U.S., President Barack Obama aims to double exports over five years, while China is refusing to bow to international pressure to allow an appreciation in the yuan, which it has held at 6.83 per dollar for almost two years to help its exporters.

Japan’s new prime minister, Naoto Kan, enters office with a reputation for favoring a weak yen after saying as finance minister that he wanted the currency to fall “a bit more.” French Prime Minister Francois Fillon said June 4 the euro’s drop below $1.20 is “good news” after a gain that was “penalizing our exports.” Britain’s Osborne said last week in Beijing he is “keen” to make the U.K. more trade-driven.

‘Who Will’ Buy?

“If everyone’s expecting to export their way out of trouble, who will be buying?” said Alvin Liew, a Singapore- based economist for Standard Chartered Plc. “Countries may resort to inward-looking policies and protectionist sentiment.”

Merkel Says Recovery Can’t Trump Cutting of Budget Deficits

Treasury Secretary Tim Geithner and German Chancellor Angela Merkel had a big disagreement over policy action.

Please consider Merkel Says Recovery Can’t Trump Cutting of Budget Deficits

German Chancellor Angela Merkel said economic growth can’t come at the expense of reductions in budget deficits, hinting at differences with the U.S. over the pace of paring public spending.

The German government “believes we must not achieve growth at the expense of high deficits,” Merkel told a news conference. Treasury Secretary Timothy Geithner, who attended a meeting of G-20 finance chiefs in South Korea that ended today, called on Japan and European countries such as Germany to boost domestic demand to complement the U.S. “shift towards higher savings.”

Merkel is pressing European countries for budget savings to protect the stability of the euro, which has declined 16 percent versus the dollar this year amid investor concern about deficits in countries such as Greece. She’s heading a two-day Cabinet meeting starting tomorrow in Berlin to set budget cuts for 2011.

Merkel Seeks ‘Decisive’ German Cuts

For more details on Merkel's proposals, please consider Merkel Seeks ‘Decisive’ German Cuts as Geithner Urges Spending.

Chancellor Angela Merkel said Germany is poised for a “decisive” round of budget cuts that will shape government policy for years to come, fueling disagreement with U.S. officials who favor measures to step up growth.

Speaking at the start of two days of Cabinet talks in Berlin called to identify potential annual savings of 10 billion euros ($12 billion), Merkel said Europe’s debt crisis underscores the need for efforts to ensure the euro’s stability.

“It’s not exaggerated to say that this Cabinet conclave will give important direction for Germany in coming years, years that will be decisive,” Merkel told reporters today before the meeting in the Chancellery. “We can only spend what we receive in income.”

Merkel’s government is reining in its deficit and urging fellow euro-region states to do likewise to thwart a sovereign- debt crisis. The Defense Ministry said last week there are “no taboos” when it comes to potential savings, including a possible reduction in the army’s size by 100,000 active-duty soldiers plus scrapping conscription.

Tax rises, welfare cuts and the loss of about 10,000 civil servant posts are among other measures being considered, Deutsche Presse-Agentur reported, citing unnamed government sources. The Cabinet seeks to cut almost 30 billion euros through the end of its legislative term in 2013, Bild newspaper said yesterday, without saying how it got the information.

ECB Advocates Tightening as U.S. Urges Domestic Demand Growth

It's not just German Chancellor Angela Merkel who disagrees with Geithner. So does European Central Bank President Jean-Claude Trichet.

Please consider ECB Advocates Tightening as U.S. Urges Domestic Demand Growth

European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.

The impact of narrower budget gaps “on growth could not be considered negative because it would improve confidence,” Trichet told reporters yesterday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in “old industrialized economies,” he said.

The remarks underline determination within the 16-nation euro area to shrink budget deficits in the wake of a sovereign debt crisis that has led to a 750 billion-euro ($913 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered to the G-20 by the U.S., which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery.

International Monetary Fund estimates backed up Geithner’s concern. Managing Director Dominique Strauss-Kahn said at a press briefing that efforts to cut budget deficits in rich countries could hurt growth over the next two years. Stimulus measures implemented in the last two years that haven’t expired yet should remain in place in advanced economies, he said.

A study by the fund showed that fiscal consolidation, without market deregulations that would bolster domestic demand, could shave as much as 2.5 percentage points off global growth and cost 30 million jobs worldwide.

The Busan meeting ended with no agreement on a universal bank levy and with finance chiefs pledging to work toward a November deal on increasing capital requirements for lenders.

G-20 An Amazing Success

With all the heated debate and every country doing what they want, inquiring minds just my be asking "How the heck can you call this a success?"

That's a good question so let's highlight the positives.

Defining G-20 Success

• Merkel and Trichet politely told Geithner to go to hell. Given that Geithner needs to be fired, this is a positive event.
• Europe is more concerned about sovereign debt issues than stimulating growth. Only fools like Geither and the IMF would argue against that.
• No one paid any attention to Geithner or the Keyenesian clowns at the IMF, most notably, IMF Managing Director Dominique Strauss-Kahn.
• There was no agreement on a universal bank levy. A universal tax is the wrong approach to risk management and it punishes banks with good lending practices.
  
• Geithner made a complete fool out of himself.
• A dozen cheers for German Chancellor Angela Merkel who said “We can only spend what we receive in income.” Finally Someone gets it.
  

What more could you possibly ask for?

Another Look at the Impossible

In G20 Heated Debates; Europe Politely Tells Geithner Where To Go I took a look at the impossible.

“I continue to say that I see good news from the current euro-dollar rate,” French Prime Minister Francois Fillon told reporters yesterday in Paris. President Nicolas Sarkozy “and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports,” he said.

French President Nicolas Sarkozy comment on the Euro highlights the impossible task of making everyone happy.

The US, EU, UK, Japan, and China all want a weaker currency. It cannot be done.

Today's statements from Alvin Liew, a Singapore-based economist for Standard Chartered Plc. sums up the situation nicely ...

“If everyone’s expecting to export their way out of trouble, who will be buying?” Countries may resort to inward-looking policies and protectionist sentiment.”

As a result of reckless over-spending by nearly every country on the planet, it is impossible to both save and spend at the same time. Saving is the correct thing to do, even though it means more near-term pain.

Geithner needs to fired. He is hopelessly out of touch with reality. That everyone ignored him at the G-20 conference is not only a step in the right direction, it is the absolute best one could ever expect to come from an economic summit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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