There is only one message that comes out of Toronto, where the G20 summit has come to an end. The formation, ostensibly created to reflect changing power equations in the world economy, serves no purpose. It has turned out to be one more talking shop in which agreement to disagree is presented as a consensus.
The disagreement that matters today concerns the near-global rush to reduce public debt by curtailing government expenditures. Occurring so soon after the Great Recession this policy stance is threatening a second recessionary dip.
The difference on this count, especially across the Atlantic, is well known. The US wants the world to sustain spending and expand markets so that it can strive to grow out of the recession. But in Europe governments under the influence of finance capital are focused on curtailing deficits and reducing debt, not by raising taxes but by slashing expenditures.
The European argument, pushed by Germany which exports its way out of trouble and benefits from the depreciation of the Euro, is that too much was spent during the recession and that it is time for fiscal consolidation. However, there are two elements of the argument that are underplayed or just ignored. The first is that much of the so-called fiscal stimulus consisted of the injection of liquidity into the financial system in various ways to save financial firms that had gambled their way towards insolvency. This did help save many banks from going bust and even restored them to profitability, but inadequately treated the ills that affected the real economy. Secondly, much of the money used for these purposes came not from taxes on institutions that had generated the crisis but from borrowing to finance expenditures, which (together with the impact of the recession on revenues) implied large fiscal deficits and burgeoning public debt.
The banks, it now appears, benefited from the second of these as well inasmuch as they increased their exposure to public debt. It appears to be the case that cheap liquidity organised by central banks and governments was used by the banks to invest in relatively lucrative government bonds, giving them the margin needed to return to profitability. The result was, of course, that the big European banks were now exposed in substantial measure to government debt. When developments in Greece and elsewhere revealed that public debt had risen to levels that were making it difficult for recession-hit governments to meet their commitments, public debt became problem number one in the eyes of finance capital.
One way of resolving the problem was to look for new ways of mobilising revenues by expanding the tax base and raising rates to garner resources to repay excess debt. The other was to curtail expenditures, and hope that the slowdown in growth that ensues would not shave revenues to an extent where the reduction in expenditure had no impact on fiscal deficits and the public debt. Raising taxes is, of course, anathema for the private sector in general and finance in particular. Hence, the emphasis in Europe is on austerity. The only victor of that strategy, if any at all, would be finance capital.
It is in this light that we should examine the outcome of the Toronto meet. The US, with support from emerging market countries like India, has been unable to shake the Europeans out of their deficit-reduction stupor. The communiqué from the summit calls on all countries to follow “growth-friendly fiscal consolidation plans,” and explicitly provides for halving deficits by 2013 and stabilising the ratio of debt to gross domestic product by 2016. The double-speak implicit in the notion of “growth-friendly fiscal consolidation” was visible elsewhere in the document as well. It points to both the “risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery,” and the “risk that failure to implement consolidation where necessary would undermine confidence and hamper growth.” This is the nature of the “consensus” which allows both sides to claim victory. Germany may have a case given the targets set for fiscal consolidation. But President Obama may be overdoing it when he claimed that the Group of 20 leaders had “forged a coordinated response to the worst global economic crisis in our time.”
None can deny that this is a time for strengthened global coordination. But disagreements appear to be too fundamental. And as wise men have told us before when there is no global leader and no possibility of coordination under capitalism another crisis is possibly imminent.
C.P. Chandrasekhar is Professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University. This article was first published in Triple Crisis on 29 June 2010; it is reproduced here for non-profit educational purposes.