The world economy is mis-functioning. The whole world is sending money to the richest country, the U.S., to feed its consumption habits. While Germany, Japan, China, and the oil exporters are in a surplus position, the rest of the world is in deficit. This is a serious problem because, unlike the U.S., other deficit countries cannot settle their accounts by printing their own money.
For poor deficit countries, getting ahead means borrowing money. But, faced with a world downturn, even existing debts become onerous. New debt looks like a bad idea. Pressures build on poor countries to cut back on spending in order to service existing debts. However, it makes more sense for the rich countries to transfer purchasing power to those with unmet needs than it does for the poor to do without.
Addressing these global imbalances is what the G8/G20 meetings in Muskoka/Toronto are supposed to be about. But the real agenda has been highjacked. The financial world wants to turn the spotlight on European government deficits. Bond market traders are getting nervous. With the help of banks, sovereign borrowers have issued a lot of debt. Now, some of these same banks are alarmed about the amount of government debt in circulation, and want governments to cut back on their spending. Dutifully, leaders such as Stephen Harper have picked up the refrain. Sovereign debt reduction is going to be the order of the day at the G8/G20.
Debt is a problem. But not sovereign debt. Consumer debt, and business debt are what the G8/G20 should be worrying about. According to the Bank for International Settlements, only 16 per cent of lending of European banks to Greece, Ireland Portugal, Spain is in the form of government debt. The remaining 84 per cent is to families and businesses.
Debt becomes a problem when borrowers simultaneously decide to cut back spending in order to reduce their outstanding loan balances. This feeds a deflationary spiral whereby consumers cut back and businesses stop investing because customers are not buying.
The worse thing governments can do under these circumstances is cut back themselves. Yet, this is what the Harper government wants the G8/G20 to endorse.
The upcoming meetings should be focused on reforming the financial sector, not government borrowing. Reigning in derivatives trading would be a good beginning as Jane D'Arista has argued convincingly. Even the European Commission sees a need for reining in derivates expansion, as well as for regulating the financial rating agencies that helped precipitate the Greek debt crisis, and failed miserably to identify problems with the sub-prime mortgage debt.
A Robin Hood tax on financial transactions has been widely endorsed by civil society groups. The At The Table campaign, a comprehensive programme aimed at reducing global poverty, and developed to coincide with the G8/G20 summits has the support of Canadian and international NGOs. In Canada, Make Poverty History wants Canadians to "take your place" and make your voice heard.
The financial interests that dominate the G8/G20 need to be the subject of its deliberations.