There was unity in the end. Or at least the illusion of it.
After sharp disagreements in the run-up to a meeting of finance ministers and central bankers from the seven largest industrialized countries, known as the Group of Seven or G7, the world’s top economic leaders sought to present a united front again over the weekend.
The world needs more growth. On that, the finance ministers can agree. To promote economic growth, the finance ministers signed off on a range of instruments: They include fiscal policy measures such as tax cuts and stimulus programs, monetary policy measures such as lowering interest rates or buying up bonds, and structural reforms that can boost an economy’s productivity. All were appropriate in principle, they said.
But when it came to actually choosing which of this large array of instruments should be used to revive the global economy, the unity of the G7 fell apart abruptly.
Instead, each finance minister seemed to focus on the growth measure that they liked best, exposing the classic divisions that have dogged the global economy for much of the past few years. Germany favors deep structural reforms. Other countries, led by Japan, want more government spending to give their economies a lift.
“Structural reforms are important; that applies to everyone,” German Finance Minister Wolfgang Schäuble said at the end of the meeting with his counterparts from the United States, Japan, Britain, France, Italy and Canada.
“Structural reforms are important; that applies to everyone.”
Mr. Schäuble said ahead of the meeting that he believed the recent tensions on financial markets were actually greater than the real economic situation warranted. He blamed some of the very growth measures that the G7 seems to have signed off on, saying he believed the current high levels of government debt and liquidity has encouraged nervousness rather than combating it.
Japan’s Finance Minister Taro Aso is taking the opposite approach, counting above all on debt-financed stimulus programs. He also butted heads on monetary policy – in this case with his U.S. counterpart, Treasury Secretary Jack Lew.
Mr. Aso sees a massive risk for Japan’s export economy. The Japanese yen has appreciated 30-percent against the dollar since the beginning of the year, when really it should have been the other way around. The U.S. Federal Reserve has held back from raising U.S. interest rates as sharply as markets had once expected, forcing other economic blocs like Japan and the euro zone to push their own rates even lower to keep up.
Mr. Aso announced that Japan would intervene to ensure a stable exchange rate. Mr. Lew said currency fluctuations are normal, and that interventions weren’t necessary. On that he seemed to have the backing of the Europeans, who referred to previous compromises of the G7 and the larger circle of G20 countries, promising not to engage in currency wars.
Despite the clear disagreements, Mr. Schäuble seemed satisfied with the meeting. That’s largely because he managed to prevent Japan, the meeting’s hosts, from pushing through a coordinated stimulus program.
“The world economic situation is better than many would have thought a few weeks ago,” Mr. Schäuble said. In Europe, the economy is performing better, which is why a stimulus package was not necessary, he said.
On the sidelines of the meeting, Mr. Schäuble also spoke with International Monetary Fund chief Christine Lagarde, with whom he has been sharply at odds in the past few weeks on the topic of Greece.
After the meeting, Mr. Schäuble said an agreement to settle an ongoing dispute over debt relief for the beleaguered Mediterranean nation was close at hand, and should be available on Tuesday. “We’ll get it done,” he said.
Mr. Schäuble has been pushing for time. He has insisted on waiting until 2018 to extend the maturities and lower interest rates for emergency loans given to Greece by the euro zone’s bailout fund, the European Stability Mechanism. This would spare him from having to ask the German parliament, the Bundestag, for approval prior to elections scheduled for next year.
Mr. Schäuble also hasn’t given up hope that debt relief won’t be needed. He wants debt relief to be agreed in 2018 only if it is necessary.
That “only if necessary” approach is similar to how Greece is tackling its budget woes. This past weekend the Greeks agreed to further cuts, as a backup measure in the case that the currently adopted budget cuts are insufficient. These would only enter into force “if necessary.”
Will Mr. Schäuble get through a similar approach to debt relief? So far, the IMF has not yet agreed to this delayed plan.