Bridges Weekly Trade News DigestVolume 16Number 38 • 7th November 2012

Eurozone Crisis, US “Fiscal Cliff” Fears Dominate G-20 Gathering


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Fears of an increasingly prolonged eurozone crisis and an impending US “fiscal cliff” took centre stage as senior finance officials from the Group of 20 major developed and emerging economies met in Mexico on Monday. The high-profile gathering comes amid discussions in other forums on how to use trade to foster a quicker global recovery and prevent a possible slowdown, and concluded just a day before the US presidential election that granted President Barack Obama another four-year term in office.

G-20 officials: “We will do everything necessary to strengthen… the global economy”

The finance officials’ gathering comes after weeks of discussions in various forums - such as French and German national leaders’ separate meetings with international organisation heads; a recent EU summit; and the International Monetary Fund and World Bank Annual Meetings - that have highlighted the continued risks to global economic growth and open markets, and concerns over how best to balance the use of monetary and fiscal policy measures in advances economies.

The results of the G-20 meeting, held in Mexico City on Sunday and Monday of this week, were therefore high on the radar of international policymakers, though observers found that the final communiqué showed little differences from the one issued by G-20 leaders in Los Cabos earlier this year and included no major decisions. The final document focused overall on the need to prevent further economic slowdown, given the high-risk climate.

“Global growth remains modest and downside risks are still elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the Untied States, securing funding for this year’s budget in Japan, weaker growth in emerging markets and additional supply shocks in some commodity markets,” officials warned in their final communiqué.

Finance officials also urged that the current reform momentum in Europe “on structural, fiscal, and financial fields” continue, while stressing the need to ensure that the public finances of G-20 economies are on a “sustainable path.”

With many advanced economies unlikely to meet 2010 targets to halve their budget deficits, however, officials said that it was necessary to “ensure that the pace of fiscal consolidation is appropriate to support the economy,” which analysts note could buy these economies some time in reducing these shortfalls and thus avert a renewed slowdown from enacting such austerity policies too quickly. According to International Monetary Fund (IMF) Managing Director Christine Lagarde, the objective is now for those deficit targets to be met by 2013.

Overall, G-20 officials agreed that efforts to date to resolve global imbalances have not achieved their intended effects. With that in mind, “we will do everything necessary to strengthen the overall health and growth of the global economy,” officials said in their final communiqué on Monday.

“Our main focus in the period ahead will be to rebuild confidence and to reduce risks and volatility in international financial markets; contribute to a faster pace of economic recovery and job creation; and promote the foundation for strong, sustainable, and balanced growth,” they said.

US “fiscal cliff,” eurozone woes share top billing

The difficulties facing the eurozone, while a prominent topic at this week’s gathering, were matched by concerns over the possibility that the US might face a “fiscal cliff” should Washington lawmakers not act in time to prevent US$600 billion in automatic tax hikes and spending cuts that many fear could push the US economy back into recession. If not prevented, the measures would take effect from 1 January of the coming year.

Speaking just days ahead of the US election, officials at the G-20 meeting acknowledged that whoever won the White House would have to act immediately to prevent the “fiscal cliff” fears from becoming reality.

“First and foremost the US leadership needs to address quickly the so-called fiscal cliff and the debt ceiling, those two risks… are clearly factors of uncertainty, not only for the US economy but also for the global economy,” Lagarde urged.

“If we’re not able to resolve the cliff, that could be the tipping point for a much more complicated scenario in the world economy,” Chilean finance minister Felipe Larraín told Reuters on Monday.

The US presidential and congressional election had largely been blamed by observers as preventing Washington lawmakers from taking definitive action; with Obama clinching his second term in the White House, and Democrats having kept their Senate majority while Republicans maintained control of the House of Representatives, analysts predict that the “fiscal cliff” will now top the US policy agenda in the weeks to come.

“I think there will be no fiscal cliff,” Organisation for Economic Co-operation and Development (OECD) Secretary General Ángel Gurría said in comments reported by Reuters. “I think that in the next months, after the election, they will come to an agreement to avert such dramatic consequences.”

Protectionism, currency concerns reiterated

Following the gathering, finance officials also stated their commitment to “open trade and investment, expanding markets and resisting protectionism in all its forms.” While the pledge is a familiar one from earlier gatherings, the meeting comes just days after the WTO released new figures on trade restrictive measures being implemented in G-20 economies that found that the pace of introducing new measures has slowed.

However, the 31 October WTO report cautioned, the continued build-up of such policies is still cause for concern, particularly given increasing trade frictions. The Geneva-based trade body therefore urged G-20 governments to “redouble their efforts to keep their markets open, and to advance trade opening as a way to counter slowing economic growth.” (See Bridges Weekly, 31 October 2012)

The G-20 event, which brought together senior officials from the world’s major advanced and emerging economies - but was notably missing US Treasury Secretary Timothy Geithner, European Central Bank chief Mario Draghi, and Brazilian Finance Minister Guido Mantega - also raised the issue of exchange rates, which have been a repeated sticking point between many G-20 members.

While the US has been among those urging China to allow further appreciation of its currency, the renminbi - a topic that was raised repeatedly in the run-up to last night’s election - Washington and Frankfurt have also come under fire by emerging economies like Brazil for their own monetary policies, specifically those involving quantitative easing. However, some have defended these recent US, EU, and Japan central bank decisions, with Australian Treasurer Wayne Swan publicly backing the move at the G-20 meeting.

“I know some question the spillover impacts from these central bank actions, but there is nothing more important to the global economy than to lift growth in the world’s advanced economies,” he said.

A report from the US Treasury Department on the exchange rates of Washington’s trading partners is expected in the coming days, having been delayed until after the finance ministers’ gathering. The report is watched closely by trade observers, particularly for its assessment of China’s currency policies.

At the end of their Mexico City meeting, officials reiterated “our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, avoid persistent exchange rate misalignments and refrain from competitive devaluation of currencies; to boost domestic sources of growth in surplus economies, and boost national savings in deficit economies.”

More collaboration between Europe and Asia?

Meanwhile, in the Laotian capital of Vientiane, leaders from European and Asian economies gathered this week to examine areas - particularly trade - where the two continents might be able to support one another.

“Asia is not able to settle Europe’s issues, but Asia can do its part to help Europe” - including by promoting trade, Singapore Prime Minister Lee Hsien Loong said at the Laos summit, in comments reported by Bloomberg.

While comments from both French and Chinese leaders focused on the need for more open markets - with French President François Hollande stressing that “the biggest threat [to recovery] is protectionism,” and Chinese Premier Wen Jiabao noting that “free, open, and fair international trade is an important driving force for world economic growth” - underlying tensions over Beijing’s currency policies and recent comments from some French officials promoting a “Made in France campaign” remained.

“Currencies must represent more faithfully the state of our economies,” Hollande remarked at the summit. “States whose trade are in surplus must necessarily accept a re-evaluation of their currencies. There must be some correction to re-balance exchanges… if we want to spur growth.”

Meanwhile, recent protectionist rhetoric from French Industry Minister Arnaud Montebourg has drawn criticism from Beijing, as reflected in a recent editorial from Chinese state-run news agency Xinhua.

“Amid an irreversible momentum towards globalisation, trade protectionism is nothing but a contemptible trick and cannot help France revive its sluggish economy,” Xinhua said.

ICTSD reporting; “G-20 fears US sharp fiscal tightening,” AFP, 5 November 2012; “UPDATE 6-G20 carves out some more wiggle room on austerity plans,” REUTERS, 5 November 2012; “Highlights - G20 meeting in Mexico,” REUTERS, 5 November 2012; “Europe, Asia Call for Open Markets to Boost Trade, Growth,” BLOOMBERG BUSINESSWEEK, 5 November 2012; “Highlights - G20 meeting in Mexico,” REUTERS, 5 November 2012; “Australia’s Swan says G20 must act to boost growth now,” RETUERS, 5 November 2012.

One response to “Eurozone Crisis, US “Fiscal Cliff” Fears Dominate G-20 Gathering”

  1. ICTSD • Finaliza reunión del G-20 alertando a la Unión Europea y EE.UU.

    [...] Elevados riesgos amenazan crecimiento mundial: G-20; El Occidental, 06 de noviembre del 2012; Eurozone Crisis, US “Fiscal Cliff” Fears Dominate G-20 Gathering .Bridges Weekly Trade News Digest. 7 de noviembre del 2012; G20 apoya medidas financieras de [...]

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