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Analysis

Merkel’s tasks for divided continent

by Vicky Pryce

Merkel’s tasks for divided continent

The G20 leaders’ communiqué on 5 September following their summit in Hangzhou, China, was the last before Germany takes over the G20 leadership on 1 December. It was, as would be expected, a positive one, full of good intentions – geopolitical stability, solving the refugee crisis, containing environmental damage, fighting terrorism, and so on.

On the economic front, the leaders acknowledged that although the world recovery was ‘progressing’, this was not happening fast enough. Investment and trade remain sluggish, unemployment is still too high in many countries, and volatility in commodity and financial markets provides a threat to stability.

The threat of protectionism emerges when economies do less well. At times the threat is realised, backed by populist movements, before unravelling over time. But the damage can be significant.

The G20 leaders called for protectionist trends to be curtailed and restated their commitment to reducing trade barriers further, setting themselves firmly against competitive devaluations. The fear of protectionism and its negative impact on world trade were also highlighted by the International Monetary Fund in its latest World Economic Outlook published in early October.

A tide of nationalist fervour

But this is hard to achieve against a tide of increased nationalist fervour, in both economics and politics. Despite the rhetoric, a World Trade Organisation report on G20 trade restrictions, published in June, found that around 70% of restrictive measures were instigated by G20 economies.

The campaign slogan ‘Taking back control’ was instrumental in convincing the majority of British voters to support ‘Brexit’ on 23 June. Donald Trump’s presidential campaign in the US has protectionism, even isolationism, as its core message.

Europe, severely shaken by the British vote to leave the European Union, has yet to decide in a cohesive way how to respond – something that the divisions evident at the conclusion of the EU’s Bratislava summit on 16 September made very clear.

Meanwhile, nationalist parties are gaining ground in France, Italy, the Netherlands, Austria and Germany. Countries such as Poland, Hungary, and Slovakia protest that their voices are not being heard. Hungary’s 2 October referendum overwhelmingly rejected European refugee-sharing proposals, although turnout was below the threshold for validity.

Southern Europeans are increasingly united and vocal about the unfairness, as well as the negative economic and social impact, of policies often perceived as being imposed by supranational European policy-makers. This creates the strong impression of a divided Europe.

One of the G20 leaders’ main pledges clearly is not being met, namely the need for well-designed and coordinated monetary and fiscal policies to achieve ‘strong, sustainable, balanced and inclusive growth’.

Rhetoric and reality

The European Central Bank is doing what it can on the monetary front, but this alone will not guarantee balanced growth. That requires other policy elements, including fiscal.

The G20 sets down a high standard: ‘We are using fiscal policy flexibly and making tax policy and public expenditure more growth-friendly, including by prioritising high-quality investment, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path.’

The reality is somewhat different. Spain and Portugal narrowly escaped being fined for missing their deficit targets. Southern European countries’ debt to GDP ratios remain unsustainable – not only Greece’s 188% but Italy’s 137%, Portugal’s 130%, and Spain’s now nearly 100%.

At the opposite extreme, Germany has ignored bodies including the Organisation for Economic Co-operation and Development,
the European Commission and the International Monetary Fund by running
a budget surplus and a current account surplus of some 7% of GDP. The current account surplus this year is expected to be even more, 9% of GDP

The popularity of Angela Merkel, the German chancellor, is falling following last year’s significant influx of refugees. This led to her suffering setbacks in recent regional elections.

In Italy a constitutional referendum on 4 December could result in Prime Minister Matteo Renzi’s downfall, though Renzi has stated that his government will remain in place irrespective of the result.

There is still no firm government in Spain after two elections – a third is expected in December – and increasing talk of new elections in Greece.

Merkel must be wishing that another country could head the G20 from 1 December. Taking responsibility for unachievable G20 pledges adds one more task to her list of unenviable challenges. ▪
 
Vicky Pryce is a Board Member at the Centre for Economics and Business Research and a former Joint Head of the UK Government Economic Service.

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