Trichet Pushes Fiscal Tightening at G-20 as Geithner Wants Demand Growth
U.S. treasury secretary Timothy Geithner, left, speaks to Jean-Claude Trichet as they take part in a family photo session at the G20 Finance Ministers and Central Bank Governors Meeting in Busan, South Korea. Photographer: Tomohiro Ohsumi/Bloomberg
June 7 (Bloomberg) -- HSBC Holdings Plc Chief global economist Stephen King talks with Bloomberg's Susan Li about the impact of Europe's debt crisis on the region's currencies and the U.S. dollar. King, speaking from Hong Kong, also discusses the outlook for global financial markets, and this past weekend's meeting of Group of 20 finance leaders. (Source: Bloomberg)
European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.
The impact of narrower budget gaps “on growth could not be considered negative because it would improve confidence,” Trichet told reporters yesterday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in “old industrialized economies,” he said.
The remarks underline determination within the 16-nation euro area to shrink budget deficits in the wake of a sovereign debt crisis that has led to a 750 billion-euro ($913 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered to the G-20 by the U.S., which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery.
“Stronger domestic demand growth in Japan and in the European surplus countries” is needed, Geithner said at a separate press briefing in Busan. Spending in both areas is “relatively weak,” he said.
Fiscal Horizon
While Geithner echoed the view that fiscal consolidation is needed, he said it should be done over the “medium term.” European officials said yesterday that budget tightening needs to come next year, and German Chancellor Angela Merkel said that growth can’t come at the price of high state budget deficits.
International Monetary Fund estimates backed up Geithner’s concern. Managing Director Dominique Strauss-Kahn said at a press briefing that efforts to cut budget deficits in rich countries could hurt growth over the next two years. Stimulus measures implemented in the last two years that haven’t expired yet should remain in place in advanced economies, he said.
A study by the fund showed that fiscal consolidation, without market deregulations that would bolster domestic demand, could shave as much as 2.5 percentage points off global growth and cost 30 million jobs worldwide.
“The world may end up in a period of sub-potential growth for two or three years,” Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore, said in an interview yesterday. “Asia is too small to support export-led growth for both euro zone and the U.S.”
G-20 Pledge
G-20 finance ministers and central bank governors said in their joint statement yesterday that “within their capacity, countries will expand domestic sources of growth.” Recent volatility in financial markets shows “significant challenges” remain for the global economy, and policy makers stand ready to “safeguard” the recovery and job growth, the statement said.
Concerns about the ability of Greece, Spain and Portugal to repay public debts have pushed down the value of the euro, helping the region’s exporters. The single currency last week touched $1.1956, its lowest level since 2006, and has depreciated 16 percent since the year began.
“Europe’s No. 1 priority” must be to implement its 750 billion-euro plan to contain the debt crisis, Geithner said yesterday. He added that “people want to see” the program implemented as parliaments finish ratifying it in coming days.
Some European leaders say they see benefits to the euro plunge.
French Welcome
“I see good news from the current euro-dollar rate,” French Prime Minister Francois Fillon told reporters in Paris June 4. President Nicolas Sarkozy “and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports,” he said.
In the U.S., the Obama administration is aiming to double exports during the next five years. Geithner warned that other countries can’t rely on the U.S. consumer to propel the global economy.
Meantime, China’s government has kept in place a currency peg to the dollar adopted in July 2008 to help its exporters after allowing the yuan to appreciate 21 percent over the previous three years.
“Something has to be done on the currency,” Strauss-Kahn told reporters in Busan. “The IMF still believes that the renminbi is substantially undervalued,” he said, using another term for China’s currency.
Japan’s Recovery
Japan’s economic recovery depended on trade for more than half of growth in the first quarter, when consumer spending slowed. At the same time, Bank of Japan Governor Masaaki Shirakawa yesterday said at a press briefing that his country’s economic recovery is stronger than previously expected and there are bright signs for a pickup in domestic demand.
U.S. indicators show little scope to propel global growth. The savings rate climbed to 3.6 percent in April, the highest level since January, from 3.1 percent in March as incomes increased and purchases cooled. Job growth was less than forecast in May, with a jobless rate of 9.7 percent.
Bill Gross, co-chief investment officer and manager of the world’s biggest bond fund at Pacific Investment Management Co., said last week the unemployment rate may rise to 10 percent within the next several months with job growth “anemic.”
“The market was assuming that the private sector was coming back, but obviously we’ve seen none of that,” Gross said in a radio interview on Bloomberg Surveillance with Tom Keene.
Europe’s Banks
Geithner also singled out Europe as a region needing to push forward with financial regulation reform. “Further progress on financial repair is critical to global economic recovery,” he wrote in a June 3 letter to G-20 counterparts. “This requires, particularly in parts of Europe, further efforts to restructure and recapitalize the banking system.”
Bank of Italy Governor Mario Draghi, a member of the ECB’s governing council, countered Geithner’s assessment. Speaking at a press briefing yesterday in Busan, he said European banks are properly capitalized.
The Busan meeting ended with no agreement on a universal bank levy and with finance chiefs pledging to work toward a November deal on increasing capital requirements for lenders.
G-20 members, which account for about 85 percent of global output, include Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., U.K. and EU.
There’s been “a lot of heat,” in the G-20 talks, Shin Je- Yoon, deputy minister for international affairs at South Korea’s finance ministry, told reporters yesterday, citing discussions of European fiscal consolidation and “structural policies” to bolster growth.
To contact the reporters on this story: Mark Deen in Busan at markdeen@bloomberg.net; Timothy R. Homan in Busan at thoman1@bloomberg.net
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