Journalism-lite from the G8
21/05/2012 § Leave a comment
The G8 summit running over the weekend issued a communique on the global economy, and this was picked up by the international press. Unfortunately, the press wasn’t particularly helpful in understanding the economics. They repeated the statements in the communique, but without analysis or explanation. These statements are fundamentally political, so they aren’t much help understanding the economics.
For starters, the leaders of the G8 said this:
Our imperative is to promote growth and jobs…. [W]e commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us.
Of course their imperative is growth and jobs. The G8 isn’t going to announce its support of stagnation and unemployment. The current debate is how to promote growth and jobs. Some pretty clear lines have been drawn in economic theory and economic policy. One side supports the view that Aggregate Demand is cyclically low, and should be supported by the consumer of last resort, the government. The other side supports the view that short-term boosts will only create long-term problems; creative destruction is reallocating resources to more productive uses, and governments must strengthen their balance sheets. Both theories share the same goal: economic growth.
The G8 statement doesn’t take sides in this debate, so it is fundamentally meaningless as economics. Politically, it leaves the door open to be all things to everyone: ‘the right measures are not the same for each of us’.
Further down the communique, one statement that got people talking was this:
We agree on the importance of a strong and cohesive Eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the Eurozone while respecting its commitments.
At first glance, this looks like support for Greece, and that’s how Reuters reported it (‘World leaders back Greece’). Except the G8 might just as well have come out for unicorns and rainbows. And free wi-fi. All they have done is confirm their support for two principles. These two principles currently happen to be at odds. One way or another, the conflict is going to be resolved, and then we are going to find out their preference ordering.
Here is what they said. They want:
- Greece in the Eurozone
- Greece ‘respecting its commitments’, which means paying back all the money it owes everyone.
The OECD statistics paint a grim picture. Government debt in 2010 was about 150% of GDP and continues to grow. Government expenditure accounts for 50% of the official economy, although the informal economy is large. The difference between government revenue and expenditure in 2010 was 10% of GDP. Recall that the Stability and Growth Pact calls for a public debt of 60% or less. Put these numbers together, and the net result is this: if the government can reduce its spending by 40% (or 20% of GDP), then the country can meet its eurozone obligations in about 10 years. At least half that decrease is a real reduction, because the government is no longer spending borrowed money. The other half — the part that is paying off past borrowing — may or may not come back to Greece in the form of increased exports. Because they are euro loans, the creditors can take the repayments and spend them elsewhere.
The G8 communique is saying that they support Greece in the eurozone on terms that make it impossible for Greece to remain in the eurozone. That is why the document is fundamentally political. The business and economics journalists should say so.