President Barack Obama and other leaders of wealthy nations underscored an increasing consensus for the need to combine growth measures with relentless budget cutbacks if their countries are to work their way out of their debt troubles.
It’s a juggling act that is much harder in reality than it is on paper.
An eight-paragraph statement from the leaders of the Group of Eight nations seamlessly bridged both sides of the austerity versus growth debate, and let each decide exactly what the new emphasis on growth will mean. And it said little about where the money for more spending might come from.
Their agreement – reached quickly after a morning’s discussion at the presidential retreat at Camp David – bridged disagreement by not rejecting one approach in favour of the other, but adroitly combined them. Balancing budgets, yes, but find ways to spend, or rather “invest”, on things like education and public works.
The statement clearly reflected Obama’s insistence that Europeans go beyond the austerity approach that is championed by Germany. Obama’s stance appears to reflect concern that a deep European recession or financial implosion from Greece leaving the euro could hurt the US economy and complicate his difficult re-election bid.
In particular, the statement blesses some things that eurozone leaders are likely already doing, such as giving such indebted countries as Spain and Italy more time to close their large budget deficits. Countries need “sustainable” efforts to fix their finances, meaning they can “take into account countries’ evolving economic conditions”.
That could mean slower cuts. Spain, a recent focus of the crisis along with Greece, has sunk into recession and seen unemployment jump to 24% for the overall population, and 51% for people under 25. Spain is supposed to cut its deficit to the 3% EU limit next year, even though the European Commission itself predicts the deficit will come in at twice that. Economists say that the EU may give them and others more time.
Slowing the cuts removes less of the stimulus from government spending. Budget-cutting in countries such as Greece has meant slashing bloated public payrolls – a necessary step but one that takes money out of thousands of consumers’ pockets. Italy’s Mario Monti, a G-8 member, has already conceded his country won’t balance its budget next year as planned, but will do so in 2014.
Yet Europe’s chief apostle of austerity, Germany’s Chancellor Angela Merkel, gave up very little. She said that she was open to investment in things that would boost growth over the long term. But she made clear that didn’t mean “stimulus”, a word that, like “spending” does not appear in the document.
“This is not about stimulus programmes in the usual sense, the way we applied them after the crisis,” she said. “What’s needed much more than that are investments in research and infrastructure, for instance in Europe in digital networks.”
She conceded she was “open” to more use of Europe’s EIB development bank and unspent EU infrastructure funds to help bankrupt Greece, now in the fifth year of a profound recession. But she insisted Greece’s promises to cut back in return for bailout loans must be strictly observed. The country has no elected government right now and faces new elections on 17 June after an indecisive election on 6 May showed a majority against the austerity measures demanded under the bailouts.
Greek rejection of those terms could lead already exasperated eurozone leaders to cut off more bailout payments. That would leave the country unable to pay its bills, a step that could mean an even more savage recession and reintroduction of a devalued drachma in an effort to gain international competitiveness.
Money for investment could come from “a range of mechanisms,” it said, without citing specifics.
The ugly truth is that there isn’t a lot of money available to spend in many countries. Failure to keep reducing deficits could mean Spain and Italy would be viewed as bad risks and could no longer borrow affordably, leading to defaults that would dwarf Greece’s troubles.