WANTED “POLITICAL LEADERSHIP AND COURAGE”

 

In an article published in the Globe and Mail and the Financial Times on Monday, August 15, the Ministers of Finance from Canada, South Africa, Britain, Singapore, and Australia set out a fairly detailed coordinated strategy that they believe “would help the world get its groove back”.

There was nothing new in their proposed strategy that could not be found in policy statements made by G-7 leaders, G-20 leaders, the International Monetary Fund (IMF), and most credible Economic think tanks over the past decade.

What makes this article interesting is that these Ministers of Finance admit that the barriers to implementing policy reforms are not economic but lack of “political leadership and courage”. Let’s hope these four Finance Minister can now come up with a “magic elixir” that they, and their colleagues can use at their next finance ministers’ meeting to create some “political leadership and courage”.

Right now the very existence of the EURO is threatened.  Over the past decade,  EURO leaders were incapable of agreeing on the political institutions that would ensure fiscal discipline, as well as the structural policies needed to make their economies competitive. For the EURO to continue to exist in its current form, EURO leaders need to be realistic in their assessment of EURO prospects and agree to greater economic and political integration.

But where is the needed “political leadership and courage” going to come from?

The U.K economy is in the tank. According to the Economist, the U.K. economy grew by only 0.7% in the latest quarter and is expected to grow by only 1.3 % for the 2011. The unemployment rate was 7.3% in May. The U.K. has a budget deficit of over 9% of GDP.

In France, Prime Minister Sarkozy is fighting for political survival and the bond markets now have the French economy in their sights. He has had to call emergency meeting of his cabinet to deal with the new economic uncertainties. France has a budget deficit of close to 6% of GDP.

Italy is being attacked by bond markets and no matter what actions Prime Minister Berlusconi announces, the markets do not believe him. Italy has a budget deficit of only 4% of GDP and a surplus on its operating balance.  Unfortunately this is not enough to offset the growth in interest payments on a debt of $1.4 trillion, over 120% OF GDP.

Chancellor Merkel is fighting to keep her coalition together and her political future in tact, but at least she has a strong economy to fall back on. Germany has a budget deficit of only 1.7% of GDP. The latest numbers showed the economy growing by over 6%, with growth of almost 3.5% expected for 2011. Germany is the only country that has the financial resources to provide credibility to the European Financial Stability Fund or a EURO bond, but there is little political support for either alternative in Germany.

And then there is the U.S. and its structural fiscal problems. According to the four Finance Ministers, “The United States plays an especially important role in restoring confidence”. Talk about stating the obvious. However, it is equally obvious that the fiscal policy needed to establish credibility and confidence is one that would provide support for demand in the short term, while establishing a longer-term fiscal anchor that will control the accumulation of debt. This cannot be done without raising taxes.

 President Obama has to deal with a budget deficit of close to 10% of GDP. The unemployment rate is over 9%. He is confronting a Congress seriously divided among not just political but ideological grounds. Everyone is upset with him and he can’t seem to get a break, even from his own party or the liberal media who have taken to piling-on the President with unusual vigor. If you want to become depressed about the chances of finding “political leadership and courage” in Congress, trying watching a U.S. talk news show on Sunday morning.

The first item on the next meeting of the G-7 or G-20 Finance Ministers should be “Where can we find political leadership and courage?” with Mr. Flaherty agreeing to lead off with his newly discovered “magic elixir”.

 

 

 

 

 

 

 

 

 

 

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