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Saturday, June 05, 2010 4:21 PM

G20 Heated Debates; Europe Politely Tells Geithner Where To Go

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Demands for more stimulus fell by the wayside as concern over sovereign defaults and budget deficits caught the attention of G20 participants. Reading between the lines, it seems Europe politely told Geithner to go to hell.

G-20 Officials Had Heated Debate on Europe

South Korea's deputy finance ministers says G-20 Officials Had Heated Debate on Europe

There’s been “a lot of heat” in the discussions, Shin Je Yoon, deputy minister for international affairs at South Korea’s finance ministry, told reporters in Busan today during a break in a meeting of G-20 officials.

Shin said the European crisis was the dominant issue discussed by G-20 officials, with mixed views about the possibility of the region’s sovereign-debt woes spreading to other parts of the world.
Hot Air From Geithner on the Yuan

Geithner Says G-20 Discussed More Flexible China Yuan Policy
Finance officials from the Group of 20 nations discussed how a shift towards a higher U.S. savings rate can be complemented by a “more flexible exchange rate policy” in China as well as stronger domestic demand in Japan and Europe, Treasury Secretary Timothy Geithner said today after a meeting in Busan, South Korea.
That discussion was totally useless. China will do what it wants when it wants until the market (not hot air from Washington) forces China's hand.

G20 Drops Support For Fiscal Stimulus

The Financial Times reports G20 drops support for fiscal stimulus.
Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

Many other finance ministers accepted market realities had changed the G20’s policy, Christine Lagarde, French finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth”.
The Minority Speaks

Speaking for the minority, Geithner Tells G-20 Reliance on U.S. Will Curb Growth.
Treasury Secretary Timothy Geithner told his Group of 20 counterparts that the pace of the global recovery depends on domestic demand in Japan and Europe, and countries shouldn’t rely on spending by U.S. consumers.

“The necessary shift towards higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand” and end to the yuan peg in China, Geithner wrote in a letter before a two-day G-20 meeting in Busan, South Korea that ended today.

Geithner’s remarks underscore signs of differences over how quickly to rein in public spending, with the Treasury chief warning that fiscal tightening won’t “succeed unless we are able to strengthen confidence in the global recovery.” French Finance Minister Christine Lagarde said yesterday that budget consolidation is “priority No. 1” for most G-20 members.

European Central Bank President Jean-Claude Trichet told reporters that Europe’s best contribution to the global rebound is to achieve fiscal sustainability.

There’s been “a lot heat, a lot of heat,” in the G-20 talks, Shin Je-Yoon, deputy minister for international affairs at South Korea’s finance ministry, told reporters today.

“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.
Wanting The Impossible

French President Nicolas Sarkozy comments 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.

Nothing But Hot Air

The G-20 meeting was useless. The market had already forced Europe's hand with the action in credit defaults spreads in Greece, Portugal, and Spain as compared to Germany.

The same thing happened in the UK when Gordon Brown was tossed out of office.

US, Japan, China Day of Reckoning is Coming

Trichet's comment that the best contribution to the global rebound is to achieve fiscal sustainability is certainly accurate. Unfortunately, that comment will fall on deaf ears as Geithner, Bernanke, and the Obama Administration clowns are completely clueless.

At some point, the market will get extremely tough with the US, China, and Japan in regards to deficit spending, interest rates, currency pegs, and financing debt. However, there is no telling exactly when those days of reckoning will come or in what order they happen.

Kiss the Illusion Goodbye

With global stimulus efforts playing second fiddle to default concerns, a double-dip recession is just around the corner. Please see Hungary Tries To Calm Markets; Europe Headed Back in Recession, US Will Not Decouple for further discussion.

The Keynesian clowns will be howling that reduced stimulus killed the recovery. However, the reality is there was no recovery in the first place, only an illusion caused by unsustainable stimulus.

Mike "Mish" Shedlock
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