1. In the runup to the G20 meeting in Toronto this weekend, China has finally grasped that it will have to show some good will on its currency. That is the upshot of pressure from the US, but also an appreciation of its own best interests. With a dangerously overheating economy and strikes and demonstrations becoming daily occurrences at its factories, China knows it has to let domestic consumption grow more and rely a little less on exports. By floating the yuan, even marginally, China is doing the global economy a favour, doing itself a favour, and embarking on an excellent goodwill exercise into the bargain.
On the other hand, Europe, curiously enough, doesn’t seem to have learned anything from the failure of the Copenhagen Climate Conference, where it faced its greatest international humiliation to date and telltale proof of its dwindling clout at the global negotiating table.
Both countries know their schemes will be rejected
Le Monde recently wrote that the scheme the German chancellor and the French president came up with for the G20 was pure populism. That is a harsh verdict and, at first glance, unfair. But closer scrutiny proves it fairly justified. Merkel and Sarkozy, who could hardly see eye to eye on any aspect of EU internal matters, had to agree on something at the last European summit on 17 June. So they decided to become the champions of two proposals on financial market regulation that Europe will be taking to the G20: a tax on all financial transactions and a levy on the banks to create a bailout fund (in lieu of using public monies) in case of a new crisis.
In and of themselves, those are good ideas. The US has come out in favour of the selfsame bank levy. And the transaction tax could help fund economic growth. The problem is both countries know their schemes are going to be rejected by the G20. The Franco-German duo say that doesn’t matter, Europe is prepared to go it alone and apply the measures unilaterally.
Europe negociates with itself, not others
- This is where the echoes of Copenhagen can be heard resounding. There, too, Europe made the most progressive suggestions and declared its willingness to implement regardless of the outcome of the conference. But it had neglected to talk them over with other global partners. The US president tried to do so and, when the moment came to clinch a deal, no-one thought it a good idea to invite Europe to the negotiating table.
With whom did Merkel and Sarkozy or Barroso and Van Rompuy thrash out their excellent schemes? Amongst themselves, to save the summit and gratify their electorate. Obama is negotiating with China on the need to strike a better balance between importers and exporters, creditors and debtors, with a view to ensuring the recovery of the world economy. What is Europe doing about that same problem? Well, there is more and more talk about measures to penalise Chinese imports.
EU without a future vision
3. Obama also wants to talk to Europeans about striking a better balance between global debt and savings. That is the tenor of the letter he sent to other G20 leaders on the eve of the meeting. He has redoubled efforts to convince Merkel not to impose a Draconian austerity plan on the German economy. Some claim the plan she has seized on is, all things considered, not as harsh as one would think. But he did not got the answer he was looking for: Europe wants to get its debts and deficits under control (which is a good thing) – but with a formula in which growth is not a variable, for the simple reason that Germany, Europe’s China, is opposed to jump-starting the economy by increasing consumption.
The US population is younger and still growing: the European population is ageing and still shrinking. If we acknowledge the demographic trap in which Europe is ensnared, we’ve also got to come to terms with its inevitable decline in the long run. But there is no sign of the EU seriously worrying about that and adjusting its immigration and birth rate policies accordingly with the same obsession it shows for adherence to the Stability and Growth Pact (SGP).
4. The EU is plunging ahead without any future vision to get it beyond this crisis, apart from the severe punishment meted out to its unruly southern members and a monetary rationale based on SGP objectives, which include fighting not only debts and deficits, but also inflation. What is missing, in a word, is a new growth formula. As matters stand, Europe’s approach to its near and long-term future couldn’t be more confused.
EU / US
Austerity versus growth
“Europe and the United States confronted by deficit on the eve of G-20”, leads El País. While Washington considers economic growth a priority, Brussels – “dominated by Germany – pleads for austerity in public accounts.” Now that tensions between China and the West are diminishing following Beijing’s announcement that it intends to relax the yuan exchange rate, “the battle in the G20 is shaping up between the US and Europe”, the Madrid daily reports. While European Council president Herman Van Rompuy is calling for stringent European public deficit reductions by 2011, US president Barack Obama is putting back such measures to 2015, “once growth is consolidated”. According to Mohamed El-Erian over at the Financial Times, the austerity versus growth debate is a false one. “As a general rule industrial countries need to adopt both fiscal adjustment and higher medium-term growth as twin policy goals,” he argues.