U.S. and Europe Share Common Interests at G-20 Summit

The fourth G-20 summit just ended on June 27th. The summit has issued its G-20 Toronto Summit Declaration. The leaders emphasized that they would take the next step to promote the full recovery of the world economy.

The summit has departed from its tradition of acting in unity during the decision-making process. Instead, this time it is allowing member countries to take action based on their specific situations and take measures that are “differentiated and tailored to national circumstances.” The root cause for the change is that countries are recovering from the crisis, but the paces of recovery differ. Countries hold different chips, and every country emphasizes its own special interests. In this case, it’s much more difficult for countries to work in unity, and it’s impossible for the Toronto summit to produce a unified prescription. Of course, through this summit, the stimulus withdrawal plan is temporarily suppressed — although the suppression is just some politicians’ oral declaration and the effects remain to be seen.

Speaking of differences, at the G-20 summit, the biggest difference is decidedly between the U.S. and Europe. The U.S. is busy getting out of the crisis, while Europe is trying to rebuild confidence. On the surface, the game between the U.S. and Europe is the competition between “spending” and “saving.” However, when the former wants to continue with the economic stimulus plan but the latter tries to cut the financial incentives budget, it is like diamond cutting diamond and there is no result. In fact, behind the differences, there is a common concern: Europe hopes to express its determination to get rid of the debt spiral, but the U.S. wants investors to see that it still has irreplaceable leadership in the world. In other words, both Europe and the U.S. want to rebuild or strengthen their financial and economic credibility.

Strictly speaking, that European countries are reducing deficit is not a proactive strategy, but a passive response. But this is not withdrawing either. As the debt has “compound interests,” any debt-reconstructing brought by delay would become a greater burden in the future. A fundamental solution to the debt problem is to reduce the deficit and to “save.” But coupled with the reduction in fiscal expenditures is the decline of domestic demand. The sharp depreciation of the euro has raised the competitiveness of European goods, which would increase external needs.

The appearance of a sovereign debt crisis means that the government is no longer able to boost economic growth by creating demand out of thin air. Originally, the eurozone had a rough balance of trade, but now it seeks a trade surplus, which is bad news for both the U.S. and China. The U.S. itself has high debts, and more unfortunately, the average maturity of existing debt is very short — only four years — and it is therefore very difficult for the U.S. to dilute the debt with moderate inflation. The U.S. also needs to expand its exports and compete for external demand.

Different from investment, consumer demand cannot be increased overnight. When it’s difficult to make a bigger cake, the only thing that matters is how to distribute the cake. In the short term, it is expected that countries with large exports could reduce their exports and further open their domestic markets. China, as the country with the biggest trade surplus, is the best provider of “new external demand.” Therefore, it’s easier for the U.S. and Europe to have common aspirations when it comes to sustainable global economic recovery. To boost economic growth by enlarging exports moves the core from sustainable global economic growth to balanced global economic growth.

China announced that it would restart the exchange rate reform before the Toronto Summit, and this has significantly reduced the pressure on the RMB exchange rate at the summit. However, with decreased growth rate of domestic investment and a more competitive environment for external demand, China can only stand limited appreciation of the RMB. It is predictable that the U.S. and Europe would make more concerted efforts on the RMB exchange rate and further enlarge China’s imports and market. There is still a long way to go to prevent trade protectionism worldwide.