The G-20 Non-Surprise

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 |  Includes: FXC, FXE, FXY
by: Acting Man

Vague But Sufficient

The errors in the Reinhart-Rogoff study that have recently come to light must have been greeted with relief at the G-20 pow-wow. Color us unsurprised at the step-by-step "abandonment of austerity." One may of course be inclined to ask: what austerity? Where exactly is it practiced? Have anyone's debts and deficits begun to shrink? To be fair, several nations in the euro area have seen a bit of shrinkage in their deficit-to-GDP ratios (cumulative debt keeps growing however). The austerity concept has mainly been used to push through tax increases in nations already burdened by some of the most rapacious tax regimes in all of history. The theory apparently was that in order to mollify upset bond markets, something needed to be done, but that something should not include any shrinking of the State.

Reuters reports:G20 backs off austerity drive, rejects hard debt cut targets:

“Finance leaders of the G20 economies on Friday edged away from a long-running drive toward government austerity in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of worries over a sluggish global recovery.

The G20 club of advanced and emerging economies also said it would be watching for negative effects from massive monetary stimulus, such as Japan's – a nod to concerns of developing nations that those policies risk flooding their economies with hot capital and driving up their currencies.

Russian Finance Minister Anton Siluanov said at a news conference that officials from the Group of 20 nations believed overall debt reduction was more important than specific figures. "We agreed that these would be soft parameters, these would be some kind of strategic objectives and goals which might be amended or adjusted, depending on the specific situations in the national economies," he said.

Russia – this year's G20 chair – had hoped to secure an agreement on setting fixed targets for reducing debt by the time G20 leaders meet in St. Petersburg in September. But the United States and Japan have firmly opposed the idea of committing to fixed debt-to-GDP targets, with Washington trying to keep the focus of the G20 on growth.

"Quite frankly, the language could have been stronger but it's sufficient to move this forward," said Canadian Finance Minister Jim Flaherty.

In a communiqué after a two-day meeting, the G20 said it would be "mindful" of possible side effects from extended periods of monetary stimulus, a phrase added the insistence of South Korea to take into account the concerns of emerging markets. "Monetary policy should be directed toward domestic price stability and continuing to support economic recovery," the statement said.

The economic policies of Japanese Prime Minister Shinzo Abe have weakened the yen, but only as a by-product of stimulus geared at pulling the country out of deflation, the country's finance minister said. "To say that a cheap yen is our goal will grossly miss the point," Taro Aso told the Center for Strategic and International Studies in Washington. "The big D – deflation – is too difficult and too persistent to get rid of. At the end of the day, a shrinking Japan can only do harm to the world."

(emphasis added)

Not surprisingly, the yen immediately tanked again. The outcome of the G-20 meeting can also be summarized as: "both deficit spending and money printing are to continue as before."

Canada's finance minister Flaherty, who says he had "hoped for stronger language" was apparently happy with the "vague but sufficient" communiqué in the end.

Euro Area: Austerity Phase Over?

So what about the euro area, the presumed "austerity central"? After roughly 10 months of falling bond yields, Olli Rehn opined ahead of the G-20 meeting that the "vague but sufficient" formula seems good for the euro area as well. The deficit spenders were "preaching to the converted," according to Rehn.

“The euro zone will slow its budgetary belt-tightening to help reinvigorate economic growth, a top EU official said on Thursday, highlighting a policy shift the United States has long been pressing for. "They are preaching to the converted," EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters.

The pace of fiscal tightening around the globe is set to dominate talks by finance ministers and central bank governors from the Group of 20 advanced and emerging economies, who are meeting late on Thursday and again on Friday in Washington.

Among the topics up for debate is whether or not to set numerical targets for debt and deficit reduction beyond 2016. But it appeared progress toward an agreement on a coordinated debt reduction plan to follow up on a 2010 agreement reached in Toronto would be hard to come by.

Rehn said when markets started refusing loans to some euro zone countries at sustainable rates in 2010 for fear they would not be paid back, the euro zone had no other choice but to sharply cut borrowing and spending.

[...]

"In the early phase of the crisis it was essential to restore the credibility of fiscal policy in Europe because that was fundamentally questioned by market forces," Rehn said. "There was no choice. Decisive action was taken."

"Now, as we have restored the credibility in the short-term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term," he said, noting the United States was now being more aggressive in its deficit cutting than Europe.

"I have been somewhat struck by the perception of the economic and fiscal policy in Europe," Rehn said, pointing to the deficit reduction numbers as evidence Europe had already taken decisions to spread out its deficit cuts.”

(emphasis added)

We're not sure Rehn has run this "go slow" idea past Germany, as other sources speak of "unbridgeable ideological differences over budgets" at the G-20 meeting, complete with "finger pointing" and a "fight over setting debt targets." Specifically, Germany's finance minister was quoted as not being overly happy about the attempt to weaken belt-tightening commitments:

“Delaying necessary adjustments would further aggravate risks for the prospects of a lasting and fundamentally sound global recovery,” German Finance Minister Wolfgang Schaeuble told the fund’s 188 member nations.

[…]

Schaeuble used the meeting to promote “growth friendly” deficit-reduction policies he’s pursued at home. His boss, Chancellor Angela Merkel, last week said “we always talk about austerity — that’s the new word that’s often used — but forget that we never talk about the fact that we have to pay back debt.”

(emphasis added)

Keep in mind though that the opinion of Germany's political leadership on the topic is not shared by every government in the euro area. German views are mainly colored by the fact that the country is the biggest guarantor of the EU's bailout vehicles (German politicians are per experience not averse to vote buying maneuvers at home). A comment by France's finance minister Moscovici is telling in this regard:

French Finance Minister Pierre Moscovici went further, saying on Bloomberg Television that “it would not be reasonable to go further into austerity” and “people cannot stand it anymore.”

Moscovici actually has a point, as people are no doubt fed up with austerity as it is currently practiced in Europe. However, no one, least of all France, seems willing to tackle Europe's vast, deeply entrenched and in many cases, overpaid bureaucracies. They don't produce anything useful and can certainly not be said to be in the business of fulfilling consumer wants, but they do represent a powerful block of voters in many nations.