The G7 fails to agree on growth but protects the big banks

Informal meeting between the EU and the Ministers for Trade of the G7 on the sidelines of the World Economic Forum in Davos, (EC Audiovisual Services).

Once more the world got together in the G7 group of the industrialised nations and asked Germany to spend more in order to help the rest of the Eurozone and the globe start growing again. The last time was in Washington during the Spring Conference of the International Monetary Fund and the World Bank, where Berlin was almost isolated in defending the austerity option. Now again during this weekend in the G7 gathering of the seven ministers of Finance, Wolfgang Schäuble, was rather alone in supporting severe austerity.

The members of the G7 group are the United States, Japan, Germany, France, Britain, Italy and Canada, while the G8 is the G7 and Russia. There is information however that the pressure on Germany were not as strong as last time in Washington. Probably the reason is that Berlin has already agreed to discuss some kind of relaxation regarding spending for growth.

Growth v consolidation

The seven ministers focused on two main issues, growth and banks. Let’s start from the most important one, growth. As it usually happens in such meetings the United States asked the countries with important reserves, like Germany (around $1 trillion) to spend more on growth policies and stop cutting down on government expenses. So Berlin took all the heat. After all this was an internal Atlantic matter. The US expect a lot from Germany.

The British minister of Finance George Osborn however, gave a rather mild version of what happened. He said that, “This meeting confirmed there are more areas of agreement between us on fiscal policy than is commonly assumed.” Osborn added that we “discussed the importance of credible, country-specific, medium-term fiscal consolidation programmes ensuring sustainable public finances and sustainable growth”. Probably Osborn wanted to play down on the differences because the G7 was hosted in Britain.

In any case Osborn puts in central place the antithesis between Washington and Berlin, over Germany’s miser income policies and cut down government spending. It has to be reminded that, the US support, at a large government cost and a mounting public debt, an unstable growth rate of 2% of the GDP. At the same time Germany, despite being a surplus and low debt country, refuses to do the same, breaking away from any Atlantic cooperation is left. On top of that many Eurozone countries apply severe austerity programmes on German insistence. The logic behind the American proposal is that, if Eurozone relaxed this severe austerity policy the Atlantic economy, comprising Western Europe and North America, could probably enter a new growth period, during which the fiscal consolidation would be realised without much pain.

Unfortunately Germany still insists that Eurozone must first achieve fiscal consolidation and then discuss growth. Reportedly Wolfgang Schäuble rejected decisively the American proposal during the G7 meeting and said Eurozone must first regain confidence. The German minister however was not alone in insisting that fiscal consolidation comes first and then the discussion on growth spending.

The Minister of Finance of Holland and President of the Eurogroup, Jeroen Dijsselbloem, who loves Teutonic austerity, delivered last week a policy setting speech at a debate in Brussels on the future economic, monetary, banking and political union, hosted by the European Commission. He stressed that, “The EU must not waver in its commitment to achieving sound public finances. The future of the Economic and Monetary Union, but also the future of the European social model, depends on us recognizing clearly that we cannot spend and borrow our way to recovery in a sustainable way. Future investments in education, healthcare and active labour markets policy, are all predicated on sound public finances. Fiscal consolidation may weigh on growth in the short-term, but it is an absolute condition for the EU’s prosperity in the middle and long-term”.

Again Dijsselbloem echoing Berlin’s dictums speaks of short and long-term policies. As if he never has heard anything about the self-feeding vicious cycle of austerity and recession. As the European Sting editor Dennis Kefalakos wrote on 29 April “(fiscal) Relaxation gains everyday more momentum. Last week even Ollie Rehn, the European Commissioner responsible for EU’s economic policies, has joined the club of ‘relaxationists’. First was Manuel Barroso, the President of the European Commission, who clearly indicated that the presently applied policy mix, containing only austerity, cannot deliver growth”. Seemingly the confrontation between the ‘relaxationists’ and the ‘growth seekers’ holds well, despite some sings for a compromise released from Berlin.

Too big to fail

Unlike the confrontation over austerity and growth the G7 must have found some common grounds on financial/banking issues. Speaking after the meeting Osborn stressed “we should work to make sure that no bank is too big to fail”. A lot of people will question how sincere Osborn was in saying that. The London City is full of such beasts and nobody threatens them with anything more than some fines on being ‘bad boys’ on certain matters, like setting up world interest rates markets.

In Eurozone there is also the same attitude towards the banking sector. Actually the European Union is developing a very detailed legislation (Directive) about bank recovery and resolution, but not for the big guys. It’s not only that. The Commission, the EU Council, the European Parliament and almost all governments have agreed to enact the European Banking Union and charge the European Central Bank with the new task to supervise the 200 ‘systemic’ banks of Eurozone.

Dijsselbloem described all that in detail speaking in Brussels last week. He observed that, “the rapid implementation of agreed rules on bank capital requirements and the Single Supervisory Mechanism is essential…it will place all systemically important Eurozone banks (200) under the direct supervision of the European Central Bank. It will also ensure that when banks are in trouble the alarm bell is sounded early…now we must turn our attention to how we resolve failing banks… A clear hierarchy of claims will need to be agreed in this context…ensuring that the private sector bears the primary responsibility for bank resolution… Furthermore, establishing a Single Resolution Mechanism to ensure the timely and orderly resolution of failed institutions is a priority”.

The Dutch minister of Finance, without saying it clearly he makes here a strong distinction between the 200 systemic banks of Eurozone and the rest 4,800. Resolution will be needed only for some of the many. The 200, placed under the guidance of ECB, cannot fail because they are covered by the quasi guarantee of the central bank. This is what he meant but didn’t dare to say it. Exactly what happens in the US, where the big ones can never fail.

Nothing has really changed in the United States after the crisis of 2008 and the big banks are always free to ‘create’ as much money as they like, by undertaking excessive risks with other people’s money. If they fail again, and they will, the Washington government will be obliged again to pay for their rescue, exactly because, they are “too big to fail”.

In Eurozone also there are some national banking groups in Germany, France, Holland and elsewhere which are also “too big to fail”. Berlin and Paris have already expressed some reserves over the European Banking Union. Obviously they want this new institution to safeguard primarily their huge national banking groups. Resolution and recovery cannot refer to them.

The safe 200

As a result, it is not by accident that in around 2015, when this new Bank Resolution and Recovery Directive will be in force, at the same time the European Central Bank will place under its surveillance the 200 systemic banks of the euro area. In this way the ECB will guarantee that those banks are absolutely safe. As a result those lenders will pay much less for their own borrowing and thus gain an advantage against the rest of the industry.

In short the G7 group hardly agreed on anything. Germany keeps insisting that austerity comes first, and will back slightly from this position only if the pressure from the rest of its Eurozone peers becomes unbearable. As for the banking sector, the ‘too big to fail” continue to call the rules of the game on both sides of the Atlantic. It is probably true that Osborn has not many friends in London…

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