G20: Less growth, more austerity for developing countries

  IMF – World Bank’s annual meetings and the G20 Finance ministers and central bank governors gathering in Washington D.C. this weekend proved two things; first that the world is more divided now, in the aftermath of the financial crisis and second and more important that the labouring millions of the globe in developing and advanced countries, must now work more and get less in order to cure the financial malaise, which still engulfs the globe. Last but not least it seems that nobody believed there that the US may default. Of course everybody agreed that if the US doesn’t solve its internal political stalemate during the next two days, the world wouldn’t want to know what it may follow. It was much more important however to learn that the American central bank, the Fed, is definitively preparing to normalise its super relaxed monetary policy, and recall the trillions it has lent to US banks at zero interest rate. Four years of such money cornucopia was enough for the American banks to fully recapitalise themselves at the expenses of the rest of the economy. This abnormality though cannot continue, because the US economy cannot take any more of this cure. However normalising this policy means much tighter credit conditions and higher interest rates not only in the US but also in all and every financial markets, mainly in the developing world. To get an idea where this could lead, it suffices to read the relevant paragraph of the G20 Communiqué, issued after the meeting. What the G20 asks from developing countries The Press release goes like that, “We recognize that strengthened and sustained growth will be accompanied by an eventual transition toward the normalization of monetary policy and that volatility of capital flows continues to be an important challenge. Sound macroeconomic policies, structural reforms and strong prudential frameworks will help address an increase in volatility. We will ensure that future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated. We will cooperate to make policies implemented for supporting domestic growth also support global growth and financial stability and to manage their spillovers on other countries”. It is pretty clear what all that mean. Sound macroeconomic policies and structural reforms, are direct references to austerity policies and more deregulation of the labour market, abolishing whatever workers’ rights are left in our brave new world. It’s not only that though. Central bankers and ministers also want, “strong prudential frameworks”. The meaning of it is clearly that more state aid and support to banks will be needed in the developing world, after the cheap American money returns to the US and leaves those lenders out in the cold. Of course the public subsidies to banks, needed to keep them in good shape, should come from cutting down other chapters of government expenditure, because overall state deficits must be reduced (sound macroeconomic policies). As a result taxpayers’ money that was used to finance education, health and social policies, should now be used to support the banks all over the developing world. Bankers want more Obviously the G20 central bankers and ministers of Finance wanted in this way to prepare the world for this new era of more expensive money and tighter credit conditions. The problem however is that in large parts of the world already reigns an explosive conjuncture, combining extremely high unemployment and almost non-existent credit options for households and SMEs. Hopefully, Eurozone will avoid this killing cure. Actually, its southern countries are now fighting to exit from such a deadly combination. Mario Draghi, the President of the European Central Bank has repeatedly confirmed during the last three months that interest rates will be maintained at their present or lower levels and Eurozone banks will be supplied with ample liquidity on demand. Of course not to forget, that the South of Eurozone is cut off from Eurozone’s core financial markets. Add to that the severe austerity measures applied there for more than four years and you come up with a clear picture of what the developing world will go through in the near future. Sadly enough, in this case the fall will start from a low level. Consequently the above quoted G20 policy proposals are directed exclusively to the developing world, where cheap dollar loans financed both the private and the government sectors and thus greatly contributing to the strong growth rates achieved in countries like Brazil, Turkey and others. Of course the advanced countries will suffer from the fall of demand from the developing world, and possibly this can mean more woes for southern Europe. Last but not least it must be mentioned that developing countries with strong internal financial system, like China, will not be hurt much by these new unpopular policies. Unfortunately, it is clear then that the G20 confirmed this weekend the European Sting’s article of 9 October entitled, “Preparing for developing countries the ‘Greek cure’”.