G-20 Meeting Stresses Fiscal Consolidation

Over the weekend, G20 Finance Ministers and Central Bank Governors clashed over various solutions regarding the global economic recovery. Countries like China and Germany who have high levels of savings expressed the desire for greater austerity measures from nations who have obtained an absurd amount of debt. On the other hand, indebted nations recommended that savings-rich countries be more profligate.

At the meeting, finance ministers were unable to agree on new rules related to the financial markets, however, they still aimed for additional capital requirements for banks by the end of 2012. Going forward, it will be interesting to see what measures these ministers will take as banks such as UBS AG have warned that the capital proposed by central bank governors may further impinge on credit growth. However, the main focus of this weekend's meeting was fiscal consolidation. The U.S. expressed fears that rigid austerity measures will undermine the global recovery. Meanwhile, German Chancellor, Angela Merkel stated that "we cannot achieve growth at the expense of high deficits; we must develop our growth paths on a sustainable path."

Moreover, U.S. Treasury Secretary, Timothy Geithner warned that the fall in U.S. consumer demand and the American economy cannot continue to absorb world exports and that "without further progress on rebalancing global demand, global growth rates will fall short of potential. In this context we are concerned by the projected weakness in domestic demand in Europe and Japan."

Interestingly, most ministers/governors are aiming to export their way out of trouble. Japan's former finance minister, now the prime minister of the world's third largest country announced that he is in favor of a weaker yen, whereas, the prime minster of France stated that the drop below $1.20 is "good news" for the euro after a gain that was "penalizing our exports." Additionally, U.K.'s Chancellor of the Exchequer George Osborne last week publicized that he is "keen" to make the U.K. more trade driven. With these countries looking out rather than in, who will import their goods?

Looking ahead, we are unlikely to see G-20 members come to an agreeable term in the short term as across emerging Asia, countries are on the path to scale back stimulus measures, while political concerns in Germany and Japan (Risks for Intervention Could Resurface as Kan Takes Office) are constraining further stimulus measures. All in all, deleveraging in highly indebted nations will be increasingly painful in the near term if savings-rich nations do not stimulate domestic demand. This is a major concern looking at Germany which has a trade surplus. Nonetheless, G-20 members ended off their meeting agreeing to meet again on October 22-23, 2010 in Gyeongju, Republic of Korea in advance of the November 2010 Seoul Summit