The deficit debate
The sustaining of the global economic recovery has been one of the hottest topics among the G20 nations for several years. Now, at the forefront of this debate, is France and Italy’s defiance of targets, which clashes loudly with Germany’s tough stance. The rhetoric is fierce; the fiscal stakes are high. Can the sides agree on constructive policies to drive economic reform?
Last Wednesday, the Italian government postponed its projection for a balanced budget until 2017. It hopes to avoid another year of recession by slowing the reduction of the deficit, leaving the country’s debt to GDP ratio expected to rise 2% next year. On the same day, hours later, its neighbour announced a similar stance. France had previously agreed to abide by the European Union target and reduce its deficit to below 3% of output. But now it’s bending the rules. Under its current plan, the public deficit will fall to 4.3% in 2015, 3.8% the year after, and finally hit the goal at 2.8% in 2017. French Finance Minister, Michel Sapin, justified his 2015 budget, “Our economic policy is not changing, but the deficit will be reduced more slowly than planned due to economic circumstances - very weak growth and s economic recovery relies on individual members taking responsibility for their own budgets and commitments, and the President of the BGA, Germany’s main exporters’ association, said of France, “If that country doesn’t figure a way out of the downward spiral, the euro and therefore Europe are at risk.”
In light of these events, it looks probable that world’s policymakers will rehash their known stances when they meet in Washington later this week. The Eurozone will likely face pressure from much of the Western world to foster growth, especially as the dollar strengthens, but, Germany, its largest economy, will advocate for the continuation of austerity measures. Given Germany’s influence, we can expect the currency bloc to steer clear of any full quantitative easing programme, as it has so far done, but that doesn’t mean all stimulus is off the table. However, it could be the case that if the euro keeps falling, this will have a positive longterm influence on exports and growth.
The idealist may hope that our leaders will leave Washington with an action plan that furthers our economic futures. The realist may believe that only one thing is for certain: investors must be prepared for a world in which the major economies have differing monetary policies.