Obama Skeptical about Art & Craft of Balancing Budgets during Crises

Europe versus the United States? This is the new weekend match. The G20 countries are deeply divided on the issue of a global banking tax, on the propriety of adopting fiscal austerity measures now while the recovery remains fragile and on the extent of measures to take to restore the balance in public finance.

For simplicity, we can see two fault lines: one that deals with the taxation of banks; the other on the austerity policies. On the first point, Canada, China, India and Australia in particular, fiercely oppose the imposition of a global tax on banks, while the U.S., Great Britain, Germany, France and the European Union are clinging on to it with their bare teeth.

But on the second point we see a sort of crossover between Obama’s America and, grossly put, Merkel’s Europe — even if on the eve of the summit each has striven to minimize these differences. But the divisions are such that the former Prime Minister Paul Martin, considered as the father of the G20, launched a rather solemn appeal to reason. “The question to ask is not how you keep New York, London or German bankers happy, it’s how you keep the global economy healthy.(…) What, in the end, will determine the G20’s success or failure will be the ability of its greatest powers to recognize that the protection of national sovereignty in today’s world depends no longer on territorial isolation but on territorial cooperation.”

On the austerity issue, Barack Obama sent a letter last week to his colleagues in which he implored them not to reduce too quickly their spending on the grounds that it could derail the recovery. Some European countries, shaken by the Greek debt crisis, did not want to hear this appeal. Great Britain and Germany presented budgets this week that include significant cuts and higher taxes. To the contrary, the U.S. president wants his partners to “reinforce the recovery” by stimulating consumption. “We’re all sitting there together, focused on this challenge of growth and confidence, because growth and confidence are paramount,” the U.S. Treasury Secretary Timothy Geithner emphasized in an interview with the BBC on Friday.

Obama takes his view from a theory strongly supported by Nobel Prize-winning economist Paul Krugman: “Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.” And he continues: “In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy.”

Extremely pessimistic that the political economy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day, the Nobel Prize winner believes that “German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe’s troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.”

Obama is not more optimistic: “Economic turmoil in one place can quickly spread to another. Safeguards in each of our nations can help protect all nations.” In addition, several NGOs on Friday condemned major world leaders’ unfulfilled promises for development, by handing out yellow cards: on his card, Nicolas Sarkozy was accused of failing his 2008 commitment to enroll 16 million more children in Sub-Saharan Africa in school by 2010. The creation of a $2 billion fund for education is still needed from Barack Obama, and the NGOs also called for “action plans” against global warming, AIDS, and infant mortality. “Where is the $20 billion promised during the last G8 summit in L’Aquila in Italy?” these NGOs have asked. “Put the money on the table, save lives!”