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 Times change: British and French troops celebrate after sacking the summer palace of the Emperior of China, 1900.
Several progressive commentators decried the final communiqué of the recent G20 meeting in Toronto. Paul Krugman in the NYT gave a withering analytical critique of the deficit reduction plans of European countries, while Naomi Klein was inspired to polemics of outrage.
The most important lesson to draw from the meeting is that the governments of the major European countries decided to give a short-term acceleration of the long term decline of the economic power of the West.
The context of the G20 was the stark difference between the economic performance and policies of the United States and Europe, on the one hand, and the Asian and Latin American countries, on the other. On track to fall behind China in terms of economic power, the governments of the major countries of Europe, especially the United Kingdom, Germany and Spain, have decided to speed up their region's decline by depressing their economies while the government of China enthusiastically increases public expenditure to replace weakening external demand. For the four quarters through March 2010, the Chinese economy expanded at almost nine percent on an annual basis, while the major EU economies had zero growth.
Quarters |
2009.2 |
2009.3 |
2009.4 |
2010.1 |
Average |
US & UK |
-0.4 |
0.1 |
0.9 |
0.5 |
0.3 |
EU, major |
-0.1 |
0.3 |
0.1 |
0.2 |
0.1 |
EU, other |
-0.5 |
0.3 |
0.2 |
0.5 |
0.1 |
China |
7.9 |
8.9 |
8.4 |
9.5 |
8.7 |
Brazil |
1.5 |
2.2 |
2.3 |
2.7 |
2.2 |
India & South Korea |
2.2 |
2.5 |
1.1 |
3.5 |
2.3 |
The Chinese leadership must be pleased indeed with European economic policy, as it hastens the day when the world's largest economy[ies?] will lie "somewhere east of Suez". The president of the United States seems the only leader of a western developed country to resist the lemming-like rush of the Europeans to the edge of the economic cliff. Politicians in Beijing must have been doubly pleased to see President Obama forced to smile and concede to a collective depression commitment (which he has no intention of following).
If not pleased, the governments of the major developing countries present in Toronto must have been bemused. Having for the last decade increasingly linked their economies to China, they must be speculating as to why the European leaders are so eager to demonstrate the wisdom of that shift. That link contributed to growth rates averaging over two percent for Brazil, India and South Korea. If rather modest, these were robust compared to the near-zero performance of the medium and small EU-linked countries.
In addition to possible bemusement, the leaders of China, Brazil, India and South Korea must have gone along with the final communiqué with tongue-in-cheek and fingers crossed, since all are implementing fiscal a stimulus in their own countries (as is the government of Japan). It is only a mild overstatement to say that G20 deficit reduction is in practice a German-British project, entered into only reluctantly and with bad-grace by other European governments (if at all).
The enthusiasm of the Cameron government for deficit reduction might credibly be attributed to ideologically-driven ignorance, but the behaviour of Merkel and her coalition seems inexplicable. Inflation in Germany is near zero after one adjusts for quality changes in commodities, the fiscal deficit and public debt are small, and the country enjoys an enormous trade surplus that would ensure that a fiscal stimulus would not generate balance of payments problems.
In addition, the contraction policy is and will be extremely unpopular for an already unpopular government. There seems no rational reason for a purposeful compression of the German economy. The infamous "financial markets" argument is irrelevant, because the German debt is relatively small and its borrowing would be small on international markets. Further, the suggestion that there might be some risk in the bonds of a government with a massive trade surplus is absurd.
One possible explanation of the new German Problem is that a fiscal stimulus would end the real wage repression that has been so successful in generating a trade surplus for Germany and pushing all other EU members into or deeper into deficit. I shall pursue this possibility in a subsequent comment.
[On German wage repression, see the excellent report on the Greek debt crisis of the Research on Money and Finance, on the web link provided at the left on this page.]
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