The Prime Minister and the G20
Prime Minister Harper’s op ed in the Globe today on his hopes for the Cannes summit is disappointing, even if the contentÂ comes as no surprise.
His focus is on the danger of a relapse into a global recession precipitated by a worsening of the European financial crisis. This is indeed a hugely important issue which the EU will have to deal with decisively, butÂ he avoids mention of the fact that the recovery in the advanced economies is already slowing to a snail’s pace and that unemployment and under-employment remain very high, especially in the US and in Europe. Â Â Unless the G20 can come up with an agenda for growth and job creation, the real economic situation will worsen, and this will further derail hopes of lowering government debt and deficit levels and any lasting solution to the sovereign debt crisis in some EU countries.
Echoing the US, the UK and the IMF, Harper calls on the eurozone to take “immediate and decisive action to resolve sovereign debt and banking system issues”, and rightly so. But he also calls on them “to implement plans for debt and deficit reduction that are clear and credible.” This is contradictory at two levels. First, most proposals on the table to expand the European Financial Stability Facility and to recapitalize banks vulnerable to collapse in the event of sovereign debt defaults would add to the public debt of the most solvent EU countries, notably that of Germany and France. Second, insistence on fiscal austerity can only make it more difficult for the still solvent countries with high levels of debt, such as Spain and Italy, to grow their way to a falling debt to GDP ratio.
Progressive voices in Europe are calling for a different approach, one that would give to the currently hobbled European Central Bank the power to effectively guarantee sovereign debt, as is the case in the US, the UK, Canada etc. This could be done directly, or by making the EFSF into a bank whose lending would be guaranteed and, if needed, backstopped by the ECB.Â Progressives are also calling for expansionary monetary policy in Europe – where a recent hike in interest rates made the sovereign debt situation worse – and also for more expansionary fiscal policy, perhaps at the pan European level.
Harper goes on to call on all G20 countries to “set clear and concrete medium-term debt and deficit reduction plans” based on the Toronto G20 commitments. In fairness, the words “medium-term” could be taken to imply some support for immediate stimulus and a slower near term pace of deficit reduction in countries with high unemployment, most notably the US. The IMF has been making noises along these lines. However, Harper did not take the opportunityÂ to extend support to President Obama’s proposed job creation package. This is significant since support at the G20 level could help break the political log jam in Washington.
Quite where Canada sits on this is unclear, but Harper rightly calls for “an unequivocal commitment to the full and timely implementation of the financial sector reform agenda agreed to in previous summits.”Â This should surely go beyond higher capital requirement for banks to include a financial transactions tax (FTT) to hit high frequency trading and much closer regulation of the “shadow banking system” of hedge funds and private equity and investment bank speculators who are continuing to drive excessive volatility in the financial markets in search of quick trading profits. Harper remains firmly opposed to the FTTÂ which the EU strongly supports and has placed on theÂ G20 agenda.Â
Harper also touches on the importance of global economic rebalancing andÂ exhange rate flexibility, implicitly supporting a needed shift of global demand to countries with large trade surpluses and artifically low currencies (ie China.)
Finally, Harper pats Canada on the back for striking the right balance between deficit reduction and job creation. It remains to be seen how thatÂ balance will be maintained as and when Canada’s unemployment rate begins to rise back towards 8% as recently forecast by the IMF.Â Â