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The G-20’s Next Test

BRUSSELS – The G-20 meetings this month, first in Busan, South Korea for finance ministers, and later this month in Toronto for heads of government, mark the moment when the major players in the world economy shift gear from budgetary stimulus to retrenchment. Not everyone is in agreement about this.

Before the Busan meeting, United States Treasury Secretary Tim Geithner warned against “a generalized, undifferentiated move to pull forward consolidation plans,” and emphasized the need to “proceed in step with the strengthening of the private-sector recovery.” But the other finance ministers did not echo Geithner’s warnings. Instead, they emphasized the “importance of sustainable public finances” and the need for “measures to deliver fiscal sustainability.” Gone is the stress on cautious, gradually phased-in exit strategies; the search for a rebalancing was almost unnoticeable in the meeting’s communiqué.

This change affects Europe first and foremost. Shortly before the Busan meeting, the countries of southern Europe announced major consolidation efforts in the hope of soothing debt markets. Soon after this, British Prime Minister David Cameron announced “years of pain ahead,” German Chancellor Angela Merkel outlined a $100bn retrenchment plan, and French Prime Minister François Fillon a similar $80bn plan. .

The advanced countries face a dismal budgetary situation, with deficits averaging 9% of GDP in 2009 and the prospect of public-debt ratios rising from roughly 70% of GDP prior to the crisis to more than 100% of GDP in 2015. According to IMF calculations, to reach a 60% debt ratio in 2030 would require a budgetary adjustment of almost nine percentage points of GDP on average between 2010 and 2020. While some countries in the past undertook adjustments of similar magnitude, a generalized consolidation of this sort is without precedent.