Barack Obama has recommended that Europe stop attempting to rein in government spending with severe budget cuts. The economic recovery, according to the president, is still too fragile for government to pull out. The debate over austerity is likely to dominate the fourth G20 summit held in Toronto, Canada over the weekend.
Last week, the American president already warned European countries in general that their austerity measures threaten economic stability. He blamed Germany in particular for relying too much on exports which supposedly gives it an unfair advantage.
The issue has divided Europe with France complaining the loudest about Germany’s lack of internal demand. Its surge in exports would come at the expense of weaker eurozone members, France alleges. German chancellor Angela Merkel has always denied this charge but now she faces two powerful colleagues, Presidents Nicolas Sarkozy and Barack Obama, dissatisfied with Germany’s multibillion euro budget cuts and its export driven growth — on top of internal pressure from her opposition.
The economic recovery is at the top of the agenda in Toronto. Obama’s criticism of European policy hasn’t exactly been cherished across the Atlantic. The European Commission, backed by member states as Austria, Finland, Germany and the Netherlands, has continually defended the Stability and Growth Pact even in times of crisis. Countries were allowed to momentarily ignore the treaty while the recession was at its worst but the Greek debt crisis has persuaded most that tough budget rules are necessary now.
Most, if not Obama, evidently. His own administration is still staring at a trillion dollar deficit and a national debt that is steeply rising. It is an odd twist of fate that the president of the former bulwark of capitalism should be urging a continent once dominated by interventionist governments to do more to help their economies. Europe however has woken up to the reality and is dominated by fiscally conservative forces today. Central bankers in particular disagree with the American assessment that an end to deficit spending will hamper growth. Jean-Claude Trichet, head of the European Central Bank, was quoted as saying that “the idea that austerity measures could trigger stagnation is incorrect” while German Finance Minister Wolfgang Schauble warned governments not to become “addicted to borrowing as a quick fix to stimulate demand.” According to Schauble, “Deficit spending cannot become a permanent state of affairs.”
Obama is still more popular in Europe than he is at home but among European policymakers, there is doubt about his transatlanticism. He declared himself the “Pacific president” for instance and signalled frustration with Europe’s apparent lack of cohesive leadership. As ever, Washington doesn’t know whom to call when it needs to speak with Europe and would just like the continent to form a United States of Europe already and elect a president that is truly on part with his American counterpart. It doesn’t appear that this administration recognizes the progress that has been made in this regard during the last several years. If anything, fears of a European debt crisis have brought the continent closer together with virtually all member states agreeing on the necessity of some form of European economic governance.
Something else the European countries, but not the G20, agree upon is the introduction of a bank tax. Australia, Brazil, Canada and Japan are not in favor of an international tax on banking activity. These countries point out that their financial institutions didn’t fail. Canadian prime minister Stephen Harper has said that there is only “a minority” in the G20 in support of the measure.
It is one proposal on which Europe and the United States agree. The EU has already promised to introduce a bank tax regardless of whether or not the G20 takes action. Coupled with the mounting discord on deficit spending however, this divide casts doubt upon the very effectiveness of the group. In the mid of the financial turmoil, the G20 proved able to reassure markets but now, it fosters more uncertainty than it takes away. The Toronto summit is unlikely to meet expectations. Particularly the rising powers of the world, including Brazil and India, will be frustrated if old world transatlantic quarrels should prevent this summit from being remembered as a success.