BY KIMBERLY ELSHAM
G-8 members are meeting this May against a backdrop of one of the worst global recessions in history, and the best course of action for recovery is the hottest topic up for discussion at their summit.
The countries’ leaders need a meeting of the minds to figure out how to boost their sluggish economies, but economists say many factors are dragging down growth. For starters, the United States and Europe have a sensitive symbiotic economic relationship, which continues to upset the slow improvement.
“Whenever bond markets have a suspicion that these political responses are insufficient, you get increasing spreads and high volatility. I do expect this (slow growth) to continue for quite some time,” said Francisco Torralba, a Morningstar economist.
“This takes many quarters for it to be clear for everyone. The more austerity you have, the less growth, then the more unemployment, and tax revenues decrease, so the debt hole increases,” Torralba said.
Recovery in the Eurozone presents a special problem because of its distinction as a group of individual economies trying to come to a consensus before making major changes, such as hammering down an acceptable austerity program.
“They’re bickering about the size of it,” said Martin Edwards, associate professor of international relations at Seton Hall University. “External observers are saying, ‘The point of creating this reserve is to make it so damn big that you can’t use it.’
If one country had a financial hiccup, he said, the EU could easily handle that kind of austerity agreement, but when multiple countries are in trouble, and because EU member countries have to make decisions collectively, it can become a long debate about who would get more or less money.
As an example, he said, the German public is getting weary of lending money to help other countries. “The bill is effectively becoming due for Germany. They’re dragging their feet, which is obviously a problem.”
A push for fiscal union in the EU – austerity agreements are only one example of that – is not new. But now, Edwards said, European institutions such as the European Central Bank and the IMF aren’t creating incentives for countries to keep their sovereign budgets down, which is stifling any movement forward.
Member countries are currently allowed to handle their own fiscal policy, and some are choosing to cut sovereign budgets as a short-term fix. Torralba said this presents a problem.
“Spain in particular has chosen to implement the fiscal austerity goals that are far too aggressive,” he said. “They’re just damaging to the economy in the short term,” he said, adding that a timeline of 10 years instead of three for Spain to reduce its deficit would be more realistic and less damaging.
He explained Spain and other countries leave many fiscal decisions to regional governments, and it can be slow-going to have these smaller decision-makers look at the bigger, global economic picture when global financial groups ask them to.
The slow recovery also calls into question the viability of global financial institutions in their current state and under the current leadership. Though the IMF has been traditionally headed by a European and the World Bank by an American, Domenico Lombardi, senior fellow at Brookings, said perhaps we will see a regime change as emerging markets such as China, South Africa and Brazil gain more stake as their economies grow.
“They can express very good candidates,” Lombardi said. “There’s no reason why the U.S. or Europe would need to keep that monopoly [on those institutions]. The other regions are capable of having a good candidate.”
“In the best scenario Europe will be in a convalescent phase for the next several years,” he said. “Europe will go into a slight growth or very moderate growth.”
If things take a turn for the worse, however, Torralba said there could be some shakeups in terms of which countries actually remain in the Eurozone.
“If there was a big surprise meltdown [that] involved Spain, Italy or both defaulting or leaving the Eurozone, that would be a big shock. I would expect growth to slow down, possibly have a mild recession in the U.S., but that’s only in the worst-case scenario in the Eurozone. In the absence of that, I think the impact of what’s happening in the Eurozone is not going to be much bigger or smaller,” he said.
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