Canada and the U.K. are seeking to galvanize an austerity alliance within the Group of Eight amid mounting pressure to ease up on the spending-cut strategy.
Canadian Prime Minister Stephen Harper meets his U.K. counterpart David Cameron today after addressing the British Parliament at noon in London. He then visits Paris and Dublin as part of a week-long European trip that concludes with a G-8 summit in Northern Ireland starting June 17.
Divisions are deepening over the pace of budget cutting and whether austerity worsens slowdowns or helps end them by boosting investor confidence. Global finance chiefs clashed over the issue at a meeting last month near London.
“My sense is the austerity guys are not necessarily winning this debate,” said Alan Alexandroff, director of the Global Summitry Project at the University of Toronto. “I don’t think the global economic tide is flowing in their direction.”
While calling the debate about austerity versus growth a “false dichotomy,” Harper said today that “countries that do not bring their finances under control or that close their economies” risk losing their global power.
“Nothing can lead more quickly and more completely to diminished influence in the world than the decline of economic performance and financial credibility,” he said, according to an advance copy of his address to Parliament given to reporters.
Harper will carry that message to the G-8 summit.
“You can assume that wherever the prime minister is meeting and speaking about the global economy he will again stress the need to reduce debts and deficits,” Andrew MacDougall, a Harper spokesman, told reporters in Ottawa on June 7. Harper “has been a strong supporter of Prime Minister Cameron’s actions.”
Harper and Cameron have been the most vociferous advocates, along with German Chancellor Angela Merkel, of reducing debt and deficits. Canada and the U.K. have pledged to erase budget shortfalls and are pressing peers to adopt hard fiscal targets, saying structural changes such as trade agreements can offset any resulting drag. The U.S. and the International Monetary Fund argue it may be time for less belt-tightening in the global economy.
The momentum continued to shift away from austerity proponents after the European Union released some member countries from deficit targets and other budget obligations last month. Meanwhile, Canada, the U.K. and Germany have failed to convince partners to adopt new debt-reduction objectives.
At their last meeting in Washington in April, Group of 20 officials deferred a decision on setting hard fiscal targets beyond 2016 and endorsed the Bank of Japan’s efforts to stimulate domestic demand by expanding its monetary base.
Germany is facing pressure within the euro area to allow more stimulus, said Peter Jarrett, a Paris-based economist with the Organization for Economic Cooperation and Development. “The strongest arguments are going to come from Germany’s European partners,” Jarrett said June 10 by phone from Warsaw.
The clash echoes a dispute over a 2010 paper by Harvard economists Carmen Reinhart and Kenneth Rogoff that’s been used by some policy makers to justify austerity in the U.S. and Europe.
In response to an April 15 study, in which University of Massachusetts at Amherst researchers question their methods, Reinhart and Rogoff acknowledged they had inadvertently left some data out of their calculations.
While Reinhart and Rogoff claim the error doesn’t change the thrust of their research, Nobel laureate and Princeton University economist Paul Krugman has said the two are doing little to dispel what he calls a misconception generated by their paper that economies falter when debt levels exceed 90 percent of GDP.
The IMF, in a reversal of its austerity prescriptions of the 1990s, is now arguing nations should be wary of cutting back too quickly or risk even weaker economic growth and higher debt burdens.
The debate flared at the meeting in May, where U.S. Treasury Secretary Jacob J. Lew pressed European policy makers to intensify efforts to revive their economies by reconsidering the pace of budget cuts and seeking ways to unfreeze credit markets. Canadian Finance Minister Jim Flaherty criticized the U.S. position as “ambiguous.”
“The Americans need to be more clear where they stand on this,” Flaherty said in a May 10 interview in Aylesbury, north of London. “They seem to be wanting to encourage economic growth more than fiscal responsibility.”
Flaherty projects Canada’s budget will swing to a surplus of about C$800 million in the fiscal year starting April 2015 from a deficit of C$25.9 billion in the year that ended March 31, as the government limits spending growth to the slowest pace since the 1990s.
Cameron has also signaled he will resist foreign pressure to slow the U.K.’s austerity drive, which is running into IMF criticism. Without the economic growth upon which his plans rested, Cameron’s government is missing its debt reduction targets and has forecast austerity to last beyond the original 2015 target.
The IMF, which had backed his handling of the economy, urged Britain in April to ease its budget-cutting drive with growth only now starting to show signs of revival.
The IMF also advised Canada to consider growth-supporting measures if its economy doesn’t accelerate. The fund predicted in April that Canada will have the slowest growth this year among Group of 20 countries outside Europe.
Cameron will probably press G-8 leaders on the austerity issue at the summit at the Lough Erne Resort, and will argue the best way to fuel growth is through trade promotion and other structural changes, not more spending, said John Kirton, political-science professor and head of the G-8 Research Group at the University of Toronto.
Cameron is promoting “trade liberalization as the great stimulus,” Kirton said in a June 7 telephone interview. More trade means “we don’t have to blow our taxpayers’ wallets or budgets with more discretionary fiscal stimulus.”
Cameron and Harper will also go to the G-8 armed with some evidence their policies aren’t harming their economies. Canada’s economy added the most jobs in more than a decade in May, while the U.K. jobless claims have fallen for seven straight months, including a drop of 8,600 in April.
The Canadian economy will expand 1.6 percent this year and 2.4 percent in 2014, according to median forecasts of analysts in a Bloomberg News survey. The U.K. economy will expand 0.8 percent and 1.5 percent, compared with 1.9 percent and 2.7 percent in the U.S., separate surveys show.
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