Everybody for himself in G20 and IMF

G20 Finance Ministers and Central Bank Governors met in Washington on April 18. (G20 photographic library).

The G20 meeting of this last weekend evolved in the shadow of the confrontation between the US Secretary of Treasury, Jack Lew and the German Federal minister of Finance Wolfgang Schäuble. Obviously the subject of this antithesis was the reluctance of Eurozone to apply the American recipe for economic growth. That is the issue of Eurobonds to support the countries in problems, let the ECB increase its refinancing to banks and extend the repayment period of sovereign debts. In short the American ‘advice’ to Europe was to overcome an over indebtedness problem with more debt. The target of this policy mix is to increase effective private and government demand for goods and services and through that to support the world economy. Presumably this will help the US and the developing economies grow faster.

From the European side the answer was equally straight forward and Dr Schäuble was not alone in expressing it. Nor secretary Lew was alone in asking. The German minister found strong support from Jörg Asmussen, Member of the Executive Board of the ECB while the Americans had on their side the developing countries and Japan. No need to say that Schäuble denied the American proposal and made clear to everybody not to expect the Eurozone to grow that fast as to support the rest of the planet.

In short the Europeans stated that their first target is the consolidation of public finance and the deleveraging (reduction of debt to income ratio) of the private and the government sector and only then increase spending to support growth. This means clearly that over the next years Eurozone’s growth will remain almost negligible and in any case the world should not expect anything more from the old continent.

The interesting thing is that this G20 meeting in Washington was concluded without the slightest hint about cooperation. All participants and more so the Americans and the Europeans didn’t back from the above described positions, without any visible hint for a possible compromise. This was a clear divergence from the so far evident efforts for cooperation. Seemingly the world economy has decisively overcome an imminent danger of a major crisis and the policy makers in the big economies think they have the luxury to start looking inwards, to fix their home problems first and then try to help others.

The IMF

The same atmosphere was evident also in the twenty-seventh meeting of the International Monetary and Financial Committee of the IMF, which took place also in Washington this weekend. The communique issued after the meeting starts with the observation “Policy actions have defused key short-term risks.” Given that the IMF was evidently closer to the US and the developing countries’ position and the text clearly put more pressure to Eurozone than elsewhere by saying, “ Growth in the euro area as a whole has yet to materialize. Continued progress in improving public finances is essential in most advanced economies. Where country circumstances allow, fiscal policies should avoid pro-cyclicality, focus on structural balances, and let automatic stabilizers operate fully to support growth”.

In short the IMF urges Germany (Where country circumstances allow) and indirectly the European Central Bank to do a lot more to help the entire Eurozone grow and through that support the US and developing economies’ efforts to accelerate. What pertained to Germany was dully answered by Schäuble. Then came the turn of Jörg Asmussen.

The ECB

This member of the Executive Board of the ECB speaking at the Bank of America/Merill Lynch Investor conference, in Washington DC, on 20 April clarified what ECB can and cannot do. It’s interesting to reproduce here the relevant quote of his speech: “Some may ask: why can’t the ECB do more? Why can’t the ECB be more like the Federal Reserve… or the Bank of Japan, for that matter? Why can’t the ECB engage in quantitative easing or have an employment target?
Those who make these calls must first consider the very different institutional set-up in which we operate. The ECB can only take measures that are consistent with its mandate. Our primary objective is price stability, we do not have the wide mandate which for example the Federal Reserve has.

Second, the structure of the financial market in Europe is very different…

Third, the specific economic challenges we face differ from those in other parts of the world.
In this day and age, where many look to central banks as the ultimate problem-solvers of many economic ills, let me also be clear that there are clear limits of what we, the ECB, can – and cannot – do. We cannot repair unsound budgets. We cannot clean up struggling banks. We cannot solve deep-rooted problems in the structure of Europe’s economies”.

In this way Asmussen made clear that the ECB cannot and will not solve all Eurozone’s problems. Government and private over indebtedness have to be addressed by those who are responsible. In short European politicians and central bankers send the message that Europe will first solve its debt problems and then start spending more money on growth.