G7 talks

Schäuble's Home Game

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The heads of the G7 in front of the Frauenkirche in Dresden.
  • Why it matters

    Why it matters

    Mr. Schäuble has repeatedly been criticized for preferring austerity over a lax budget policy. Dresden offers him another chance to convince his foreign counterparts that his way is the right way to turn the global economy around.

  • Facts

    Facts

    • Dresden is playing host to a three-day summit of finance ministers and central banks from the world’s seven leading industrial nations, a bloc known as the G7, from May 27 to May 29.
    • Mr. Schäuble, who has rejected calls from his peers to ease back on austerity, invited a series of notable economists to the summit to thrash out ideas for ending Europe’s economic crisis.
    • Ministers are also expected to discuss a standardized code of conduct for the financial sector, a type of “oath” for bank employees, which is already law in the Netherlands.
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    Audio

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The venue was chosen with care. For German finance minister Wolfgang Schäuble, a member of Chancellor Angela Merkel’s center-right Christian Democratic Party, Dresden serves as a shining example of his firm convictions on fiscal policy.

The capital of the eastern state of Saxony, one of the wealthiest kingdoms in the German-speaking world in the Middle Ages, was famously left in ruins by Allied bombing at the end of World War II and later became part of the communist former German Democratic Republic.

In the years since Germany’s reunification in 1991, Dresden has witnessed a major transformation, an economic rise like few other cities in the former East, restoring much of its former grandeur and become one of the country’s biggest tourist attractions.

Perhaps most importantly, Dresden is debt free and has a balanced budget. Mr. Schäuble now hopes Dresden can show his counterparts around the world that it is possible to save and invest at the same time.

That is his message to the finance ministers and central bank chiefs of the seven leading industrial nations known as the G7, who since Wednesday night have been attending a three-day summit in Dresden hosted by Mr. Schäuble and Jens Weidmann, president of the Bundesbank, Germany’s central bank.

Dresden’s balanced budget comes despite spending hundreds of millions to fully refurbish its museums since German reunification. That includes rebuilding much the Dresden Royal Palace that was home to its Saxony kings, and the historic Taschenbergpalais hotel, both of which were hosting events with the finance ministers over the course of the three-day summit.

“A Grexit should be avoided, because when a country for the first time leaves the euro zone, then this will not be the same stable currency union as before.”

Haruhiko Kuroda, President, Bank of Japan

For years, Mr. Schäuble and Mr. Weidmann have had to endure reproaches at international conferences — whether at G7 summits, or in the wider G20 group of leading nations, or at semi-annual meetings of the International Monetary Fund, the IMF.

Each time since Greece’s near collapse in 2010, which sparked the euro zone’s wider economic crisis, Mr. Schäuble’s U.S. counterpart has arrived at summits calling for the Europeans, and in particular the Germans, to use more money to help Greece and other southern European countries out of their economic malaise.

Mr. Schäuble and Mr. Weidmann have generally remained alone in their insistence that consolidating federal budgets is the only way forward. Backed by Germany’s more conservative economic establishment, they have rejected the idea of debt-financed economic stimulus plans and been outspoken in their conviction that central banks should not flood the markets with cheap money.

In Dresden, the tables have turned. As the hosts of the G7, the two Germans are the ones setting the agenda.

And this time, there would not be negotiations into the morning hours over a closing statement that finds the right balance between promising additional funding for growth, or how much frugality the G7 states want to achieve worldwide.

Instead, Mr. Schäuble prescribed an open discussion in the form of a seminar with economists for his colleagues from the United States, Japan, France, the United Kingdom, Italy and Canada.

It was hoped that Nouriel Roubini, Robert Shiller, Lawrence Summers and Kenneth Rogoff would encourage the ministers and central bank governors to engage in open dialog instead of the usual recriminations.

“The idea of talking with academics proved successful,” Mr. Schäuble said afterwards. He has expanded the G7 round table talks into a kind of mini world economic forum.

But the controversial question of whether the developed world needs to save so that their economies can grow, or whether the economy must grow so that they can save, has remained unresolved in Dresden. Perhaps unsurprisingly, the experts have been unable to agree.

While Harvard economists Alberto Alesina and Kenneth Rogoff shared Mr. Schäuble’s view that solid state finances form the basis for lasting growth, former U.S. finance minister Lawrence Summers and Yale professor Nouriel Roubini warned against the dangers of a policy of austerity.

At the start of the meeting, Mr. Schäuble’s officials had repeatedly emphasized: “We all agree that we want to achieve higher growth rates in industrialized nations, and that investment and solid state finances are a prerequisite for this.”

However, not all participants adhered to the fiscal ceasefire.

Despite the round table talks in Dresden’s baroque Royal Palace, U.S. Treasury Secretary Jack Lew remains convinced that his government’s route out of the financial crisis was the right one: the U.S. economy is growing again and the central bank is beginning to curb the flow of cheap money – even if Mr. Weidmann countered that the Federal Reserve is moving much too slowly.

Indeed, some hope it is Germany that has learned its lesson through the exercise. One representative of a central bank, who declined to be named, said: “It’s good that Mr. Schäuble has now also been told by high-ranking economists that saving during a recession is poison.”

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Our way or the highway. Wolfgang Schäuble and Jens Weidmann leading the G7 in Dresden. Source: AFP

 

Japan’s representatives at the summit have also been determined to offer a different message: that their country’s looser economic monetary policy and fiscal spending – a direct contradiction to Mr. Schäuble’s prescriptions – could offer another way out of the crisis.

Haruhiko Kuroda, the head of the Bank of Japan, defended his own expansionary monetary policy in an interview with Handelsblatt, pointing out that Japan suffered from persistent deflation for 15 years and that the situation only started to improve in 2013 thanks to the new quantitative easing program.

Mr. Kuroda, whose policy of buying up government bonds has been imitated in many countries, pointed out that the euro zone, which includes Germany, is currently implementing its own “quantitative easing” program.

“I think this is necessary. The euro zone suffered from deflationary risks until the ECB started its QE program. These risks have now been significantly reduced,” he said.

Mr. Kuroda said he was determined to reach his target of 2 percent inflation as quickly as possible and that he currently expected to achieve this in the first half of next year. He admitted that he could not predict whether the ECB would achieve its own 2-percent target as it hopes to by 2016.

“It's good that Mr. Schäuble has now also been told by high-ranking economists that saving during a recession is poison.”

Central Bank Official

The Greek crisis also gave the theoretical debate between economists some practical relevance, even if the German hosts made every effort to push the Greek debt crisis into the background, having planned to touch on the subject only lightly during a general 90-minute debate on Friday.

In fact, the issue was discussed repeatedly on the fringes of the official talks. After all, the key players were all in Dresden: European Central Bank president Mario Draghi, IMF head Christine Lagarde and Jeroen Dijsselbloem, the president of the euro group that steers policy for the currency bloc. One participant reported that everyone was talking to everyone else about Greece.

This was partly due to interjections from distant Athens, with Greek prime minister Alexis Tsipras saying publicly that he believed negotiations were “on the finishing straight.”

No one else shared this opinion, however. E.U. diplomats reported that a range of issues remained unresolved in negotiations with the government in Athens, such as the primary surplus that the country should target for this year, and what additional cost-cutting measures will be required to achieve this. There is also still reported to be some dispute over reforms to pension schemes and the labor market.

The situation with Greece is becoming increasingly dangerous. Athens is running out of time. It needs to pay back around €300 million to the IMF on 5 June. Many observers believe that Greece does not have the money. Alternatives are now being sought.

The European Commission hopes that Athens will be able to defer the payments due in June until the end of the month and then bundle them together into one transfer. A high-ranking EU diplomat told Handelsblatt that this option was currently being discussed with the IMF.

Mr. Lew is convinced that Greece will never get better with Mr. Schäuble’s medicine, and called on the Europeans and the IMF to be courageous and use more money to finally put an end to the crisis in Greece. Mr. Kuroda also urged European leaders to find a solution.

“A Grexit should be avoided, because when a country for the first time leaves the euro zone, then this will not be the same stable currency union as before,” Mr. Kuroda told Handelsblatt. “Then it will be more like a system of fixed exchange rates. And these systems have not been very successful in the past.”

Meanwhile, another issue being discussed at the G7 meeting is a code of conduct for the financial sector, along the lines of the system introduced in the Netherlands at the beginning of April.

Since then, each of the Netherlands’ 90,000 bankers has had to swear to do everything in his or her power to maintain and promote trust in the financial industry. Any bankers who breach the code may face heavy fines and be banned from working in the industry for up to three years.

In London, where the financial sector is particularly tightly regulated, the Banking Standards Review Council (BSRC) also wants to develop standards for dealing with whistleblowers and conflicts of interest. It hopes that a code of conduct will help prevent excesses like those that occurred before the financial crisis.

Ministers at the G7 conference are now examining whether a uniform code of conduct could prevent scandals in future, or at least minimize them. BaFin, the German financial regulator, did not want to comment on the plans for the time being, as details are not yet available. The association of private German banks indicated that it was open to the idea in principle.

 

Donata Riedel and Jan Hildebrand lead financial and political coverage for Handelsblatt in Berlin. Ruth Berschens is Handelsblatt’s bureau chief in Brussels. Michael Maisch and Elizabeth Atzler in Frankfurt, Christopher Cermak in Berlin and Katharina Slodzyck in London contributed to this story. To contact the authors: Riedel@handelsblatt.com, hildebrand@handelsblatt.com and Berschens@handelsblatt.com 

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