In the third and final part of this blog, we look at the G8 summit at Camp David on 18 and 19 May 2012. Ways of averting the deepening global economic crisis were top of the agenda.
In terms of the global economy, the leaders agreed on three main things. The first was that they supported Greece remaining in the euro. According to the communiqué:
We agree on the importance of a strong and cohesive eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the eurozone while respecting its commitments. We all have an interest in the success of specific measures to strengthen the resilience of the eurozone and growth in Europe
The second was a commitment to ‘fiscal responsibility’ and the clawing down of public-sector deficits.
We commit to fiscal responsibility and, in this context, we support sound and sustainable fiscal consolidation policies that take into account countries’ evolving economic conditions and underpin confidence and economic recovery.
The third was commitment to boosting economic growth. (Click on chart for a larger image.) On the supply side this would be through measures to stimulate productivity. On the demand side this would be through policies to stimulate investment.
(For a PowerPoint of the chart, click on the following link: Quarterly Growth.)
To raise productivity and growth potential in our economies, we support structural reforms, and investments in education and in modern infrastructure, as appropriate. Investment initiatives can be financed using a range of mechanisms, including leveraging the private sector. Sound financial measures, to which we are committed, should build stronger systems over time while not choking off near-term credit growth. We commit to promote investment to underpin demand, including support for small businesses and public-private partnerships.
But the communiqué was short on details. How will fiscal consolidation be achieved? Does this mean a continuation of austerity measures? And if so, what will be the impact on aggregate demand? Or if fiscal consolidation is slowed down, what will be the impact on financial markets?
If a growth in investment is central to the policy, what will be the precise mechanisms to encourage it? Will they be enough to combat the deflationary effect on demand of the fiscal measures?
And how will productivity increases be achieved? What supply-side measures will be introduced? And will productivity increases be encouraged or discouraged by continuing austerity measures?
Lots of questions – questions raised by the articles below.
Articles
Capitalism at a crossroads Independent (19/5/12)
Barack Obama warns eurozone to focus on jobs and growth The Telegraph (20/5/12)
G8 Summit: World leaders push for Greece to stay in the eurozone The Telegraph, Angela Monaghan (19/5/12)
Obama sees ’emerging consensus’ on crisis Sydney Morning Herald, Ben Feller and Jim Kuhnhenn (20/5/12)
G8 leaders tout economic growth, fiscal responsibility CNN (20/5/12)
G8 focuses on Eurozone Gulf News (20/5/12)
G8 leaders back Greece amid tensions France 24 (20/5/12)
G8 splits over stimulus versus austerity Financial TimesRichard McGregor and Kiran Stacey (19/5/12)
Cameron is consigning the UK to stagnation Financial Times, Martin Wolf (17/5/12)
Time to end ‘Camerkozy’ economics Financial Times, Ed Miliband (18/5/12)
Obama: Eurozone ‘must focus on jobs and growth’ BBC News (20/5/12)
World leaders back Greece, vow to combat financial turmoil Reuters, Jeff Mason and Laura MacInnis (19/5/12)
Germany isolated over euro crisis plan at G8 meeting in Camp David Guardian, Patrick Wintour (19/5/12)
G8 leaders end summit with pledge to keep Greece in eurozone Guardian, Ewen MacAskill (19/5/12)
G8 summit ends with few tangible results Xinhua, Sun Hao (20/5/12)
Final communiqué
Camp David DeclarationG8 (19/5/12)
Questions
- To what extent are economic growth and fiscal consolidation (a) compatible; (b) incompatible objectives? How might a Keynesian and a new classical economist respond to these questions?
- What supply-side measures could be introduced by the EU?
- Why might dangers of protectionism increase in the coming months?
- What would be the impact of a Greek default and exit from the eurozone on other eurozone economies?
- What monetary policy changes could be introduced by the eurozone governments and the ECB in order to ease the sovereign debt crisis of countries such as Grecce, Spain, Portugal, Italy and Ireland?
In the second part of this blog, we look at an interview with the Guardian given by Robert Chote, Chair of the UK’s Office of Budget Responsibility. Like Mervyn King’s, that we looked at in Part 1, Robert Chote’s predictions are also gloomy.
In particular, he argues that if Greece leaves the euro, the effects on the UK economy could be significant, not just in the short term, but in the long term too.
The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that that has consequences both for hitting economic activity in the economy, but also its underlying potential. And it’s the latter which has particular difficulties for the fiscal position, because it means not just that the economy weakens and then strengthens again – ie, it goes into a hole and comes out – but that you go down and you never quite get back up to where you started. And that has more lingering, long-term consequences for the public finances.
The interview looked not just at the effects of the current crisis in the eurozone on the eurozone, British and world economies, but also at a number of other issues, including: the reliability of forecasts and those of the OBR in particular; relations between the OBR and the Treasury; allowing the OBR to cost opposition policies; the economic effect of cutting the 50p top rate of income tax; the sustainability of public-sector pensions; and tax increases or spending cuts in the long term.
In Part 3 we look at attempts by the G8 countries to find a solution to the mounting crisis.
Articles
Robert Chote interview: ‘I would not say in the past there’s been rigging’ Guardian, Andrew Sparrow (18/5/12)
UK ‘may never fully recover’ if Greece exits euro Guardian, Andrew Sparrow, Helena Smith and Larry Elliott (18/5/12)
British economy may ‘never quite recover’ from a severe Euro collapse The Telegraph, Rowena Mason (18/5/12)
OBR report
Economic and fiscal outlook Office for Budget Responsibility (March 2012)
Questions
- Why is it very difficult to forecast the effects of a Greek withdrawal from the euro?
- Why may Greek withdrawal have an effect on long-term potential output in the UK and the rest of Europe?
- Why are economic forecasts in general so unreliable? Does this mean that we should abandon economic forecasting?
- Why are public finances “likely to come under pressure over the longer term”?
- Why might the cut in the top rate of income tax from 50% to 45% have little impact on economic growth? Distinguish between income and substitution effects of the tax cut.
The press is buzzing with talk of Greece leaving the euro. And if Greece leaves, what next? The press is also buzzing with talk of a possible, if not probable, breakup of the euro altogether – a Eurodämmerung as Paul Krugman calls it.
So is Greece likely to leave the euro, or will the Greek electorate vote next time for the parties supporting the austerity package they negotiated with the EU?
If Greece does leave the euro, what would be the implications for the Greek economy? And what would be the implications for the rest of the eurozone? Would it fall apart: would there a be a domino effect to Spain, Portugal, Italy and Ireland and then the whole eurozone? Or would Germany and the ECB do whatever was necessary to prevent any more countries leaving?
The following articles ponder these weighty questions. In the meantime, stock markets around the world have plunged on fears of the damage a disorderly Greek exit could do to the eurozone and to the global economy.
Greece, euro exit and the drummer in the band Reuters, Luke Baker (14/5/12)
Greek fire could singe rest of euro Financial Times, Richard Milne and Patrick Jenkins (14/5/12)
Eurozone: If Greece goes … Financial Times, Chris Giles, Peter Spiegel and Kerin Hope (13/5/12)
How would Greece leave the euro? BBC News, Kabir Chibber (10/5/12)
CBI: Greece eurozone exit ‘would be like an earthquake happening’ The Telegraph, John Cridland (14/5/12)
Forget what you’re hearing: Greece won’t quit euro soon Globe and Mail (Canada), Brian Milner (14/5/12)
Could the euro survive a Greek exit? BBC News, Robert Peston (14/5/12)
Greekonomics (see also) BBC News, Paul Mason (9/5/12)
This is how the euro ends – not with a whimper but a bang The Telegraph, Jeremy Warner (15/5/12)
EC and ECB working on emergency plans for Greek euro exit, says trade commissioner Karel De Gucht The Telegraph (18/5/12)
Fiddling while Athens burns The Economist (19/5/12)
Exodus, chapter 1 The Economist (19/5/12)
The Greek run The Economist (19/5/12)
Greece will leave the euro. But what then? Independent on Sunday, Hamish McRae (20/5/12)
No quick fix for Euro – maybe a slow one? BBC News, Stephanie Flanders (24/5/12)
Questions
- If Greece left the euro, what would happen to bank deposits in Greek banks?
- What would be the costs and benefits to the Greek economy of a reintroduction of the drachma?
- Why might individuals and companies, if they were able, move their euro deposits out of Spain, Portugal, Ireland and Italy into accounts based in other eurozone countries? What would be the implications of such financial flows?
- What can the ECB do to support the banking systems in vulnerable eurozone countries? Is there any theoretical limit to the amount that the ECB can offer?
- What is the role of the central banks of individual eurozone countries in a transfer of large-scale funds from one eurozone country to another? How does this impact on the receiving country (e.g. Germany)?
The UK’s trade deficit narrowed in March to £2.74bn from £2.95bn in February. The goods deficit fell just slightly to £8.56bn from £8.59bn, but the services surplus rose more substantially to £5.83bn from £5.64bn.
So was this a sign of the UK economy’s relative weakness holding back the demand for imports? Or was it a sign of a recovering export sector, especially in services?
And what of the coming months? What will be the effect of a growing crisis in the eurozone on (a) the sterling exchange rate, (b) the rate of economic growth outside the UK and (c) UK economic growth? And what will be the effect of these on the demand for imports and exports and on the trade balance? The following articles examine the issues.
(For a PowerPoint of the above chart, click on the following link: Balance of trade)
Articles
UK goods trade deficit stable as exports to non-EU countries rebound Reuters (15/5/12)
UK trade deficit narrows in March to £2.7bn BBC News (15/5/12)
Exports close UK trade deficit Guardian (15/5/12)
First trade surplus in cars since 1976 The Telegraph, Emma Rowley (15/5/12)
UK trade deficit narrows in March Fresh Business Thinking, Marcus Leach (15/5/12)
ONS Release
UK Trade, March 2012 ONS Release (15/5/12)
Questions
- Distinguish between the balance on trade in goods, the balance of trade and the balance on current account.
- Why did the UK’s trade deficit fall in March 2012?
- Why did the UK experience its first trade surplus in cars since 1976?
- What is likely to happen to the UK’s balance of trade in the coming months? How is the income elasticity of demand for UK exports and imports relevant to the answer?
- What has been happening recently to the sterling exchange rate? How will this impact on the UK’s balance of trade? How will the size of this impact depend on the price elasticity of demand and supply for imports and exports?
Original post (24/4/12)
The result of the first round of the French presidential elections on 22 April make it likely that François Hollande will be the new president.
M. Hollande can be described as an austerity sceptic. In other words, he questions the wisdom of trying to meet the target agreed by eurozone countries of reducing public-sector deficits to no more than 3% of GDP.
If elected, M. Hollande promises to adopt a more Keynesian stance of stimulating demand in order to prevent a slide into recession. This would mean a reversal of cuts and a growth, at least temporarily, of the public-sector deficit.
Currently France’s deficit is much higher than the 3% target. In 2010 it was 7.1%; in 2011 it had fallen somewhat to 5.2%. But it is set to rise in 2012, thanks to the slowing economy in France and most of the rest of Europe.
And it is not just in France that ‘austerity sceptics’ are on the ascendant. In the Netherlands the centre right government of Mark Rutte fell. He was unable to get his coalition partners to agree to sufficient cuts to achieve the 3% target. And yet, the Netherland’s deficit is considerably lower than most eurozone countries’. In 2012 it is projected to be just 4.6% of GDP.
So if doubts about the 3% target could lead to a change in policy in the Netherlands and France, what hope is there that the targets could be adhered to by countries with much larger deficits and where the pain of the cuts is already causing political turmoil?
The growth in austerity scepticism has spooked the markets. The day following M. Hollande’s first round victory and the fall of Mark Rutte’s government, stock markets around Europe plummeted and bond prices rose. The higher bond prices will make it even harder for governments to refinance maturing government debt. Take the case of France. As Robert Peston remarks in his article below:
According to IMF figures, 59% of France’s government debt is held overseas – which means that well over half of all lending to the French state is not motivated by sentimentality or patriotism in any way.
To put that figure into context, just 24.8% of UK general government debt is provided by foreigners.
Perhaps more relevantly, the French government has to borrow a colossal sum equivalent to 18.2% of GDP this year and 19.5% next year to finance debt that is maturing and the current deficit.
So what are the implications of the rise in austerity scepticism? Will it make deficits harder to finance? Will a collapse of confidence push the eurozone into a deep recession. Might the eurozone break apart? Or will a dose of Keynesian policies turn the tide and allow growth to resume, making it easier to service government debts? The following articles explore the issues?
Update (7/5/12)
François Hollande was indeed elected president on 6 May. The question now is to what extent he will be able to enact measures to simulate the economy. In his campaign he had talked about renegotiating the European treaty on budget discipline. Angela Merkel, responding to M. Hollande’s victory, said that the European fiscal treaty had been agreed and could not be renegotiated. Nevertheless, she said she was happy to consider new growth strategies that did not involve increased budget deficits.
Articles
François Hollande’s potential spending spree in France has caused concern in austerity Europe The Telegraph, Bruno Waterfield (23/4/12)
European turmoil, American collateral Guardian, Robin Wells (24/4/12)
Political risk returns to eurozone debt crisis Financial Times, Richard Milne (23/4/12)
The rise of Europe’s austerity foes Business Spectator, Karen Maley (23/3/12)
Europe: A crisis of the centre BBC News, Paul Mason (24/4/12)
Is Hollande enemy or prisoner of finance? BBC News, Robert Peston (23/4/12)
President Hollande and the IMF BBC News, Stephanie Flanders (23/4/12)
French Bond Yields Test Hollande’s Economic Fealty Bloomberg, Mark Deen and Anchalee Worrachate (24/4/12)
Dutch and French politics bring us back to reality BusinessDay (South Africa), Ron Derby (24/4/12)
Crisis topples governments like dominos Deutsche Welle, Bernd Riegert (24/4/12)
Eurozone leaders push for growth BBC News (25/4/12)
Additonal articles (after 6 May)
Francois Hollande to set France on new course after win BBC News (7/5/12)
Europe elections: German Chancellor Angela Merkel welcomes Francois Hollande but warns Greece The Telegraph, 7/5/12)
A Merkel-Hollande bust-up? Less likely than you might think Guardian, Philip Oltermann (7/5/12)
Merkel Rejects Stimulus in Challenge to Hollande BloombergBusinessweek, Patrick Donahue and Tony Czuczka (7/5/12)
François Hollande’s chemistry with Angela Merkel crucial for Europe Guardian, Ian Traynor (7/5/12)
Q&A: End of austerity? BBC News (7/5/12)
Austerity and the people’s verdict Guardian letters, Shanti Chakravarty and others (8/5/12)
Europe: The big debate BBC News, Stephanie Flanders (11/5/12)
Data
European Economy: Economic data Economic and Financial Affairs, European Commission
Eurozone Statistics ECB
French Economic Statistics INSEE, National Institute of Statistics and Economic Studies
Netherlands Statistics CBS, Statistics Netherlands
Questions
- Why do investors worry about the pursuit of Keynesian expansionary fiscal policies? Are their fears justified?
- How important is it for countries, such as the Netherlands, to retain their AAA credit rating?
- What determines bond yields?
- Do a search to find the policies advocated by M. Hollande. Assess the likely economic impact of these policies.
- What conditions are necessary for the pursuit of a tough austerity line to achieve economic growth in (a) the short term of 12 to 18 months; (b) the longer term of several years?
- Is an increased use of public-private partnerships a solution to finding a way of delivering greater infrastructure expenditure without increasing the short-term deficit?
In the third and final part of this blog, we look at the G8 summit at Camp David on 18 and 19 May 2012. Ways of averting the deepening global economic crisis were top of the agenda.
