At the G20, a Debate Over Spending and Budget Cuts

BY Larisa Epatko  June 28, 2010 at 1:47 PM EST


Heads of state at the G20 summit in Toronto. Photo by Eric Feferberg/AFP/Getty Images

At the conclusion of the weekend’s G20 summit in Canada, countries agreed to cut their deficits over the next three years in order to stabilize the global economy, but maintain flexibility to decide on their own how to do so. We asked Fariborz Ghadar, senior adviser at the Center for Strategic and International Studies, to explain more:

What were the areas of agreement and disagreement?

FARIBORZ GHADAR: Basically, the big debate was whether they should stimulate or whether they should cut the deficit. Cut the deficit was basically the posture of countries that were worried — in particular Europe — that they’re spending too much money, they have to borrow it, they won’t be able to borrow it, and their currency will be under attack.

The countries that basically didn’t have any debt problems — Brazil, China, even Canada — they wanted to make sure that the stimulation continues so that the world doesn’t go into a double-dip (recession).

The U.S., surprisingly, is kind of in the middle. But we came strongly on the side of stimulating. And you would have thought that we would be right in the middle between Europe and Brazil, China or Canada, etc. But we were much more toward the stimulating, basically putting some pressure on the Europeans to change their posture.

But at the end of the day, everybody concluded that they should cut the deficit by a certain amount over the next three years. And I think the consensus is to cut the deficit by half in three years time. And President Obama basically articulated that in the closing that by 2013, we will cut our deficit.

In several recent elections in Europe, right-leaning parties promising deficit reductions gained ground. What will this trend mean for economic recovery plans over the long term?

FARIBORZ GHADAR: On one hand, those are the countries that have the strongest social networks — basically, social support systems. If you get unemployed in the U.S., you’re unemployed. Yes, you get unemployment, but it’s a little bit more difficult, and there’s not that much support. But if you get unemployed in France, it’s much easier. The social support in Europe is much more extensive.

Yet those are the ones who want to cut the deficit, simply because they have a large deficit, particularly Greece, which is in the press all the time, but also Spain, Italy, Ireland, even the UK. They’ve got pretty large deficits, and so they are worried — and the European Union in particular with the euro — that if these countries start defaulting if their countries — Spain, Portugal, Italy and Greece — if they start defaulting on their loans, those loans aren’t held by banks, primarily in Europe. So the banks would get into trouble. So then France or Germany has to bail out their banks, who have paper from Greece, Italy and Spain.

Therefore, they came up with two things. One is let’s cut the budget deficit. Two, let’s make sure that there’s some kind of a tax levy put on the banks so that they themselves will solve the problem. The tax levy didn’t go anywhere but the budget deficit went a little bit further than the rest of the world wanted.

The impact of that on the global economy — the second part of your question — really depends on how badly the consumer is going to retrench and not spend money. If that happens, that increases the chance of a double dip. I don’t think it’s going to happen, but certainly that increases the likelihood that it could happen. That’s why countries like Brazil and China and even the U.S. and Canada were strongly urging that there shouldn’t be that much of cutting the deficit spending and more emphasis on stimulation.

What did the countries push off until the next G20 conference in November?

FARIBORZ GHADAR: The G20 is the board of directors of the global economy, so they basically said there’s quite a bit of uncertainty. We’ll do a little bit of tweaking of the budget, and we’ll do a little bit of stimulation, but we’re going to wait until we see what happens to the global economy.

Was anything else noteworthy at this summit?

FARIBORZ GHADAR: With the push to make sure that we don’t have any budget deficits with the cutting of spending, etc., we saw a much more active street presentation. It was really quite an aggressive street set of demonstrations, and that’s because the global society thinks that the board of directors of the global economy — the G20 — have not done a very good job.

So the labor movement, they haven’t kept their commitments to poverty, they gave $5 billion to mothers with children and child care, but in actual societal issues, many parts of the global society feels that the G20 were much more concerned about stimulation and the global economy and much less concerned about a society that’s basically kinder and gentler. And that’s why there were the demonstrations.