On Monday, in The Globe and Mail, the finance ministers of Canada, South Africa, Britain, Singapore and Australia set out a fairly detailed co-ordinated strategy they believe would help the world “get its groove back.” But there was nothing new in their strategy that couldn’t be found in policy statements made by G7 leaders, G20 leaders, the International Monetary Fund and most credible economic think tanks during the past decade.
What makes this article important is that these finance ministers admit that the barrier to implementing policy reforms is not economic but a lack of “political leadership and courage.” Let’s hope they can now come up with a “magic elixir” that they, and their colleagues, can use at their next meeting of finance ministers to create some “political leadership and courage.”
Right now, the very existence of the euro is threatened. In the past decade, euro zone leaders were incapable of agreeing on the political institutions that would ensure fiscal discipline, as well as the structural policies needed to make their economies competitive. For the euro to continue to exist in its current form, euro zone leaders need to be realistic in their assessment of the currency’s prospects and agree to greater economic and political integration.
But does “political leadership and courage” exist among them to make this happen?
Based on the outcome of Tuesday’s meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy, the answer is no. The two leaders agreed that the status quo was impossible and that there was a need for greater political integration, but that would have to happen in the future and only after more progress on fiscal convergence. They rejected any reforms to the European Financial Stability Fund or the creation of a euro bond.
They made a number of recommendations, including twice yearly summits of euro zone leaders and having all 17-euro zone countries make balanced budgets a constitutional requirement (good luck). But what they really did was put their own political futures ahead of the euro’s future. The markets were not impressed.
In France, Mr. Sarkozy is fighting for political survival, and the bond markets now have the French economy in their sights. France has a budget deficit of nearly 6 per cent of GDP and has to worry about its Triple-A rating. Mr. Sarkozy has had to call an emergency meeting of his cabinet to deal with the new economic worries as growth in the second quarter came to a sudden halt.
In Germany, Ms. Merkel is also fighting to keep her coalition together and her political future intact. Germany is the only euro zone country that has the financial resources to provide credibility to the European Financial Stability Fund or a euro bond, but there’s no political support for either option in the country.
Germany is now having its own growth problems. The latest numbers show the economy growing by only 0.1 per cent in the second quarter. Growth in the first quarter was revised down to 1.3 per cent from 1.5 per cent. Analysts expect little rebound in the third and fourth quarters.
Germany runs the euro zone and wants to turn the clock back to 1999 and impose the conditions that should have been imposed when the euro was first created. The weak countries can’t meet these conditions, and the financial markets know it.
And then there’s the United States and its structural deficit problems. According to the five finance ministers, the U.S. “plays an especially important role in restoring confidence.” Talk about stating the obvious. But it’s equally obvious that the fiscal policy needed to establish credibility and confidence is one that would provide support for demand in the short term, while establishing a longer-term fiscal anchor to control the accumulation of debt. This can’t be done without raising taxes.
President Barack Obama has to deal with a budget deficit of close to 10 per cent of GDP. The unemployment rate is more than 9 per cent. He’s confronting a Congress seriously divided on political and ideological grounds. Everyone is upset with him, and he can’t seem to catch a break, even from his own party or the liberal media. If you want to become depressed over the chances of finding “political leadership and courage” in Congress, trying watching a U.S. talk show on Sunday morning.
The first item at the next meeting of the G7 or G20 finance ministers should be: “Wanted – political leadership and courage,” with Jim Flaherty agreeing to lead off with his newly discovered “magic elixir.”
Scott Clark is a former deputy finance minister and Peter DeVries a former director of fiscal policy at the Department of Finance.