The deficit de­bate

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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