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|After the smiles, its beggar your neighbour|
The Times - June 28th 2010
It took an Irishman, George Bernard Shaw, to point out that Britain and America were two nations “divided by a common language”. It has taken a summit of the leaders of the G20, held in Canada, to show that Europe and America are two regions divided by a common crisis. Whatever the smiles, whatever the assurances that our friendships have “rock-solid foundations”, the weekend’s get-together showed that we are moving in quite different directions, or at the very least at quite different speeds.
The difficult question to answer is how much it matters. Europe, with Britain’s Con-Libs in the forefront, think that austerity is the route to renewed prosperity—or, to be fairer, that without budgetary austerity we will go to hell in a handbasket, thanks to our huge government debts. Japan too has announced a plan to cut its debts. America, whose economy is recovering more lustily than ours but whose budget deficit and government debt are roughly the same as Britain’s in proportion to its GDP, argues that we are all cutting too soon and risking a return to recession.
Having once all talked about the need for global solutions to the problem of financial regulation, Europe and America are separated on that issue too. The United States Congress has just approved a comprehensive financial reform bill, with little regard to European views, but one that places it well ahead of Europe in dealing with the issue. European countries have finally got round to publishing “stress tests” showing the condition of the regions’ banks, which America did more than a year ago, but will publish them only for a limited range of banks.
The other members of the Group of 20, which since 2008 has been supposedly the world’s steering committee, look on a tad incredulously, having previously imagined that Europeans and Americans would co-ordinate their views in the rich-country cartel called the G8 before airing them in public. But mainly, Brazil, China, India and the rest are relieved not to be the target of the argument themselves.
Part of the difference over fiscal policy may be a bit illusory, admittedly. It is politics that mainly explains why Barack Obama’s administration has done nothing to cut back its fiscal deficit, since it has to face mid-term Congressional elections in November and would rather contemplate pain afterwards than before. Anxiety over that choice is also why the White House lost Peter Orszag last week, its much respected director of the Office of Management and the Budget, who took a more European view of things.
It is also politics that explains why Angela Merkel and David Cameron have moved much faster than America—in Germany’s case, to stave off criticism of recklessness in taking part in the euro-zone rescue package for Greece, in Britain’s case because it is politically smart for a new government to get the bad news out early. In neither
Nevertheless, behind the argument does lie another more serious issue. It is the issue of trade and of beggaring your neighbour. As 2010 began, the Americans could tell themselves that, with their devalued dollar, they could expect an export-led recovery, and that the main obstacle to that would be rigid, artificially cheap Asian currencies, most notably China’s. Thanks to their quiet and sometimes not-so-quiet diplomacy, they expected China to start to revalue its yuan, especially as and when inflation loomed larger as a problem in that booming economy.
Just ahead of the G20, in a deft diplomatic move, China finally obliged, announcing that the yuan would now be allowed to float gently upwards. It should have been a cause for celebration in Washington, had it not been for one other four-letter word: the euro. Since the start of the year, Europe’s currency has sunk by 20% against the dollar, which also means that it has also fallen by that amount against the yuan.
So American exporters are doubly annoyed: their goods and services are less competitive in Europe, and the Chinese are disinclined to make things rapidly easier for them in China having already revalued substantially against the eurozone. The yuan may have been freed a little from its fixed dollar peg but it looks unlikely to rise even by the 5-7% a year by which it rose during 2005-08, in its brief moment of freedom before the economic crisis. The prospects of an American export-led recovery have dimmed.
So, behind an apparent philosophical difference over economic policy lies a much more concrete concern over trade. That is why Tim Geithner, the US Treasury Secretary, couched his criticism not so much in terms of fiscal policy but of the need for Japan and Europe to consume more—by which he means more American exports. The fact that he wants
Much of the international mayhem associated with the Great Depression of the 1930s was prompted by competitive currency devaluations, as countries fled the old gold standard and tried to beggar their neighbours. Things are less dramatic now, and those rock-solid foundations do militate against a serious trading bust-up between America and Europe. Nevertheless, there are dangers: first, that progress in liberalizing global trade will be even further postponed than it already is; but second, and more serious, that in the absence of transatlantic unity an apparently technical fight over trade, probably over how to deal with environmental rules and taxes, could soon undermine the whole World Trade Organisation system.
These dangers could be avoided, especially if Europeans do indeed turn out to consume more this year and next, which they might. Countries like Germany, France and Italy have high-saving households who might respond to the prospect of stabler public finances by spending more and saving less. Their economic growth could turn out a bit stronger than is now feared, and the same could be true of Britain. But then again it might not.
It would be better for the squabbling transatlantic countries to stave off these emerging trade tensions by launching serious talks on a big trade pact between the two sides of the pond, just as Europe is already doing with Canada. It wouldn’t need to reach any conclusions till safely after November’s US elections. But as the G20 shows, talking does have its uses.