Toronto's G20 Tale of Two Cities

by John M. Curtis
(310) 204-8700

Copyright June 25, 2010
All Rights Reserved.                                

          Staking out diametrically opposed positions, the world’s leading economic powers have very different theories of how fix their own economies, let alone change the glacial pace of worldwide recovery.  New World views as expressed by U.S. President Barack Obama and his Treasury Secretary Tim Geithner mirror the theory John Maynard Keynes, the 20th Century British economist who believed that government intervention, in both monetary and fiscal policy, was needed for economic recovery.  When the U.S. real estate bubble burst in Dec. 2007 triggering the latest global meltdown, former president George W. Bush and Obama countered with massive government stimulus.  Both concluded that free market capitalism couldn’t solve the economic mess without plunging the nation into another Great Depression.  Critics of economic stimulus have few options in mind.

            Had Bush or Obama opted for “austerity” instead of stimulus, more U.S. businesses would have shuttered and millions more would lose their jobs.  With the unemployment rate nearing double-digits, Depression era expert Federal Reserve Board Chairman Ben. S. Bernanke kept interest rates to a minimum, hoping to provide more stimulus through monetary policy.  Working with the U.S. Treasury, the Fed provided capital to insolvent U.S. banks, fearing more bank failures would lead to another Great Depression.  Free market advocates, and those European austerity zealots across the Atlantic, primarily Germany and France, don’t appreciate differences in the U.S. While economic socialism comes naturally to the U.K. and the Continent, the U.S. has placed its faith in free markets.   Conservatives have doubts about Keynesian economics, while Europeans take it for granted.

            Economic contraction has reduced demand for private sector goods and services, adding to the current high unemployment rate.  If Bush or Obama didn’t intervene—at the expense of more government debt—with economic stimulus, the U.S. economy would be far worse off.  European finance ministers oppose more debt-financed stimulus because their system already provides lavish welfare benefits to its citizens.  When the government already covers health care, pensions, vacations, etc., it’s easy to talk of more austerity.  In The States, however, austerity drives citizens from unemployment into homelessness, a growing problem across the U.S.  “Our annual summit takes place as the world begins a fragile recovery from the greatest economic crisis in generations,” read the G8 statement.  If that’s true, how can major eurozone powers advocate “austerity” to dig themselves out?

            European policy makers need to figure out they’re priorities:  Saving the euro or Promoting economic prosperity.  The two don’t necessarily go hand-in-hand.  Heavy-handed “austerity” imposed on by the Frankfurt-based European Central Bank on countries like Greece can only boomerang, eventually forcing Greece to abandon the euro.  Europe’s struggling economies—including the U.K—can’t afford more Frankfurt  punishment for not competing well enough with Europe’s most powerful economies.  If the ECB couldn’t handle the disparity in economies across Europe, they should have never gone to a common currency.  Imposing “austerity” and punishing less industrialized countries may help the euro’s value but decimates hard-working Europeans struggling to make ends meet. 

            President Obama stands in stark contrast of German Chancellor Angela Merkel, still mindful of Germany’s Weimer Republics, where inflation cannibalized the Deutsche mark setting the stage for WW I and the rise of Adolf Hitler.  She’s more cognizant than most of how runaway inflation and currency devaluations can destabilize an entire society.  Despite Merkel’s anxieties, she must, now that she’s part of the European Union, not think only of herself or Germany but of the consequences of beating up on less industrialized eurozone countries.  “Quite honestly, I think the world economy is faced with a number of uncertainties,” India’s Prime Minister Manmohan Singh told the Tornoto Star, not certain whether the U.S. or Europe is poised for recovery.  With Merkel and France’s President Nicholas Sarkozy urging “austerity,” it’s possible that the recession could drag on.

            Germany’s cure for the global economic crisis is more “austerity” for less industrialized eurozone countries.  Germany can’t have it both ways:  Promoting growth while preserving the euro’s inflated value.  While it’s come down around 25% against the dollar and yet, the euro must fall to parity with the dollar to make the currency more workable in less industrialized countries like Greece.  In devaluing the euro, Germany stands to lose sovereign wealth but stands to energize the eurozone.  No one in the G20 or G8 expects China to inflate the yuan to make the U.S. and eurozone competitive manufacturing powers.  Both Europe and the U.S. expect a large trade imbalance with China for the foreseeable future.  Before Merkel and Sarkozy plunge Europe into a Great Depression, they should follow Obama’s lead financing more debt to stimulate the economy and keep people employed.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.