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The following article was published in Global Times on 30 June:

Was the Toronto G20 summit from June 26 to 27 an impetus for action or a display of rhetoric? This is a difficult question to answer.

The Toronto negotiations began well before the meeting. For instance, US President Barack Obama wrote to the G20 leaders well ahead of the summit, warning of the dangers of too much austerity at this juncture. This was leaked to the press to underscore his own stimulus policies.

Obama’s letter prompted a strong reaction, particularly in Germany, Europe’s economic powerhouse.
While Obama argued that the solution to the economic problems is for everyone to help each other grow out of the crisis, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble responded by arguing in public that there is a need to save our way out of the crisis. After a telephone conversation with the US president, the German chancellor said that Obama had not criticized Germany.

The trouble is that political leaders frequently say one thing to each other and another to their domestic audiences, there being a fine line between what they really think and what image it is safe to portray in public. It can seem as if leaders’ actions at such global events are more about the message they wish to send than the substance of their actions.

The US administration is under attack from Republicans and some centrist Democrats for spending too much.
Polls have shown rising public concern about deficits. Germany’s fiscal plan is actually less draconian and more backloaded than it appears.

At present, economists are divided as to whether the remedy to the economic crisis is austerity and immediate deficit-cutting at the expense of growth, or that the primary focus should be on growth, even if it involves more incentive spending.

The US, at present, generally favors the second option, while the European countries are moving toward fiscal austerity, typified by the spending cuts introduced by the new Conservative-Liberal Democrat government in the UK.

What was decided in Toronto on the “cut or spend” debate? Needless to say, it’s a great challenge to get 20 countries to agree on anything. The skillfully drafted official G20 statement enabled all participants to claim that their deficit reduction strategy had won though.

There was a recognition of the wide variations within different countries and that a “one-size-fits-all” policy is unworkable. Most of the countries support immediate deficit-cutting rather than Obama’s stimulus policy as the way back to growth. But Brazil warned that steep budget cuts could harm emerging economies. The compromise suggests unity, but it’s hard to see what difference it will make.

The meeting urged countries carrying weighty deficits to boost national savings while maintaining open markets and enhancing export competitiveness. Surplus economies, such as China and Germany, are expected to reduce their reliance on external demand and focus more on domestic sources of growth.

There was consensus on the need to reform global financial governance but not on how. The reform agenda rests on four pillars: a strong regulatory framework, effective supervision, resolution and addressing systemic institutions, and transparent international assessment and peer review.

Despite the setting up of anti-corruption frameworks, the G20 powers couldn’t agree on the best methods to implement all four of these steps.

China, however, came out of the summit well. Its surprise announcement on June 19, ending the two-year pegging of the yuan to the dollar, took the subject off the table at the summit. Although the obligation was limited, it was generally well received.

The next summit will be held in Seoul in November. It is important to recognize that summits are relatively short, and are public events from which too much should not be expected, as they are part of a much longer process.

However, the structure of the G20, a key global institution, could be improved. Close global cooperation in economic and financial policies and to prevent protectionism is vital. After all, we are all seeking common solutions to common problems.

Stanley Crossick

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  1. From above: After a telephone conversation with the US president, the German chancellor said that Obama had not criticized Germany.

    Anyway Germany also got special attention in the WSJ last month. The US is unhappy that the economic power house of Europe is free riding on US security.

    A thriftier Bundeswehr might irk some NATO members. New members to NATO from eastern Europe are directed to spend 2% of their gross domestic product on defense, Mr. Riecke said, while German defense spending, currently around 1.5% of GDP, is moving closer to 1%.

    In Europe, U.S. Allies Target Defense Budgets

    Britain is currently conducting a thorough review of its defence commitments. Perhaps the EU could encourage all EU members to do the same thing, then collate the results for further study.

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