THE G20 met again, this time in a Mexican resort town, in an attempt to reach agreement among the leaders of the world’s largest economies on political and economic issues the world currently faces.
While in Mexico to attend the G20 meeting, the BRICS (Brazil, Russia, India, China and South Africa) leaders found time to meet as a group themselves. This was their effort to develop common stance on the four problems that received most of the attention at the summit.
The first problem the summiteers dealt with was the state of the economy of the European Union. In spite of several attempts made by the European nations to help their troubled member-states to deal with extreme economic stress, no significant improvements were made.
While the European problem was well known and well understood, no effective solution seem to be in sight..
There was now a consensus among well informed economists that there were some serious fundamental problems with the way the Union was put together. There was no central authority that could develop a comprehensive programme for bringing the continent out of the worst crisis it faces in its short history.
The European Central Bank was in charge of devising a common monetary policy but nothing comparable existed on the fiscal side. Each member of the union was responsible for making its own tax and spending policies. This bifurcation of responsibilities meant that some state could spend way beyond what they were able to raise through domestic taxation. The difference between the two could be met by borrowing heavily from the banks in the regions better-off countries. This is precisely what was done by Greece and to a lesser extent by Portugal, Ireland and Spain. These four countries in trouble have won their own, somewhat unflattering acronym – PIGS.
If the PIGS problem remained confined to Europe it would not be a matter of great concern for G20 types of groups. But in a highly globalised world, there were now all kinds of connections that linked most nations and economies around the globe.
There were some obvious linkages.
All the European nations together, bought more goods from the United States than any other political entity. If Europe was hurting it also caused a great deal of hurt to America. The evidence of this link was available every day. The stock markets in the two continents moved in tandem.
The Asians also trade with Europe and there are large flows of capital to the countries in this continent from the West. They too are hurt if Europe is doing poorly.
The second problem addressed in Mexico concerned a matter of public policy in which the political and economic spheres overlap to a considerable extent. Over the last three to four years a body opinion had developed in the political circles in both America and Europe that was uncomfortable with the Keynesian approach to dealing with economic downturns.
The British economist in the late 1930s had convinced many western nations dealing with the devastation caused by the Great Depression that the right approach was quite the opposite of the one adopted by several countries with troubled economies. As economic activity weakens, tax receipts decline, leaving the government less to spend.
Retrenching government spending worsens the situation since people lose their jobs and their incomes. This further worsens the recession or the depression. The correct approach, counseled the British economist, was for the government to spend more rather than less. In most cases this would mean printing money. But governments should not be afraid of this situation. It would cause a bit of inflation but price increases in depressed times help rather than harm.
This line of thinking has been reversed most notably by the Tea Party movement in America. The followers of this odd movement want extreme fiscal discipline: governments must live within their means. What makes this approach rather strange is that those who advocate it are passionate about keeping taxes low thereby reducing even more the spending ability of the government. Austerity is the name given to this game.
This approach to economic and fiscal management has leapt across the Atlantic and reached many European shores, most notably the United Kingdom. Extreme caution on the part of the Conservatives who currently hold the reins of power in that country has sent the United Kingdom into another recession, quickly following the one that ravaged its economy in 2008-09.
But economic theories before they become public policy must develop political legs. This did not happen across the British Channel where the Socialists in France gained power after having spent several years in the political wilderness. Since austerity causes great harm to those who are in the lower end of the income distribution scale and are, therefore, dependent on their governments for providing a number of services they view as essential the socialist governments are not likely to opt for austerity.
In other words, a deep ideological divide has developed in Europe which will make to difficult to adopt a common approach to the worsening economic situation. These differences were much in evidence in Mexico. In spite of the many pious words spoken at the summit and incorporated in the communiqué issued at the conclusion of the meeting no common position was put forward by the assembled nations.