G20 Summit in Moscow: Consequences of Austerity, Currency Wars, and Taxes

Nations that are part of the G20. Photo: Wikimedia Commons/Exile824

Nations that are part of the G20.
Photo: Wikimedia Commons/Exile824

The G20 summit in Moscow February 15 and 16 brought the world’s leading developed nations together to refine targets and plans they made last summer and bring some new economic issues to the table.  The G20 consists of 19 countries plus the European Union, representing about 90% of the world’s gross domestic product (GDP), about 80% of world trade, and two-thirds of the world’s population.

One of the hottest topics of discussion proved to be austerity measures’ harsh effects on economic growth.  Todays numbers show a bleak vision of the economy as one-third of the G20 is in a recession.  In the last quarter of 2012, EU’s most powerful economies, Germany and France, slid into the red.  The U.S. also slid back against expectations of growth as it experienced a 0.1% contraction in their GDP in the last quarter.

Despite today’s harsh economic reality, the president of the European Central Bank Mario Draghi is able to see the situation from a different perspective: “We see volatility going down. All the interest rates are going down. The crisis started with lack of funding. Large corporations are not able to fund and are issuing significantly, 55% of issuance comes from non-core countries. Deposits of the banking system have stabilized. Banks also fund themselves. A range of factors show the situation is normalizing.”

Nevertheless, today’s calculations conducted by the International Monetary Fund (IMF) show that for every one euro cut, there is a 1.50 euro loss in growth.  This new estimate is different from what the G20 expected in Toronto in 2010, where the international body made a specific target of cutting budget deficits by 50% by 2013 and stabilizing their governments’ debts by 2016.  At the time, economists estimated that a one euro cut in the budget would equate to 0.50 euro lost in growth.

Both the United States and the European Union are on the side of reducing budget cuts and debt reduction to avoid more stifling of growth.  Germany is the lone state against a more lenient attitude toward government debts. So although agreement was reached to slash budget deficits, no strict timeline and target were created for the objective like in Toronto in 2010.

Aside from the discussion on economic austerity, recent monetary policy of Japan and pleads of French President François Hollande to take action against the strength of the euro brought fears of a “currency war.”  Currency wars are competitive devaluations of currency with the intention of making a country’s exports cheaper.  IMF president Christine Lagarde said that accusations of currency wars were unfounded, calling them “overblown.” “There is no major deviation from fair value of major currencies,” she said, adding that “we’ve made good progress with respect to improving national policies. There is still a long way to go and now is certainly not the time to relax, to ease and start pointing fingers at each other.”

These fears broke out as Japan’s new government took to depreciating its currency to pull itself out of a recession.  The yen has depreciated by about 20% since November. The G20 was not quick to point fingers but instead they agreed that loose monetary policy is acceptable when used to stimulate domestic growth, but should not be used to benefit in global trade.  The same attitude was taken toward currency exchange rates by asserting that monetary policy should “continue to support the economic recovery.”

The sprit of the G20‘s consensus on budgetary and monetary politics was well united by France Finance Minister Pierre Moscovici’s statement. “2012 was the year of the recovery of the Euro, and 2013 will be the beginning of the recovery of the real economy of the eurozone,” he said.

International tax laws were the last main subject that the U.K., Germany, and France pushed to be addressed at the summit.  Asking the Organization for Economic Co-operation and Development (OECD) to make a report on the issue, they presented the findings at the summit.  They called for an update in tax laws as companies like Amazon, Starbucks, and Google have been recently criticized for “profit shifting,” whereby multinational companies avoid taxes by switching their profits and costs between countries.

UK Chancellor George Osborne said in a statement that “the international tax laws for these companies have not really changed in decades, even though the international economy has changed a lot.” The Secretary General of the OECD Angel Gurria added that in “these hard times” of austerity, if multinationals pay little or no tax through “legal” exceptions, the tax burden will fall on small and mid-sized companies and the middle class.

Putting value on international cooperation the G20 will continue to work toward addressing the current economy’s challenges.

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