The G8 and G20 meetings in Toronto, closely watched last month as Europe struggled to halt the chain reaction of doubt set in motion by the Greek debt crisis, exposed their inability to coordinate on quelling financial uncertainty.
The problems in the European Union symbolize the fragility of a unified currency that was formed without integrating the fiscal powers of its members. They also remind us that political boundaries with long histories still reign in Europe, despite efforts to integrate the region.
In other words, it is difficult to find a common solution to problems that directly affect the sovereignty of each member country. Unlike the Group of Eight, however, the G20, with so many countries involved, is finding it even tougher to agree to cooperate and find common solutions for the problems they face.
You cannot expect too much from the G20 as a forum for solving international issues. The outcome of the COP15 climate conference in Copenhagen in December is testimony to the limitations of holding mass negotiations with large numbers of countries.
This isn’t exactly a revelation. International cooperation and regional integration have always been challenging tasks. The countries that created the EU’s predecessor — the European Economic Community — were at odds as well during the 1960s.
One of the main divisions emerged between a group of nations led by France that harbored a so-called monetarist viewpoint — that financial and monetary union would lead to greater homogeneity among the regional economies — and countries like Germany, which had a so-called economist viewpoint, which stated that greater economic homogeneity must precede currency integration.
This author, who did two stints in what was then West Germany while this debate raged, recalls how the West German economic minister, Karl Schiller, was fond of the economist viewpoint.
The nations eventually overcame their differences to create the EEC. This was possible only because the key players, including Germany and France, were dedicated to avoiding further conflict after going through two major wars earlier in the century, and because the economies of the so-called Inner 6 — Germany, France, Italy, Belgium, Netherlands and Luxembourg — had reached fairly similar levels of development.
The G20 countries of today sharply differ both in economic development and political systems. Each member tends to put its own interests first.
This sets limits on what the G20 can achieve, and the Toronto conference ended up trying to set up an environment that would accommodate their individual efforts to deal with a key topic — sovereign debt.
Another limitation was exposed by their differences on two contradictory solutions: fiscal consolidation and economic stimulus.
How did the G20 leaders deal with this? By agreeing to insert a lengthy sentence in their summit declaration that spoke of “the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances.”
What challenges does this pose for Japan?
The G20 declaration states that “those countries with serious fiscal challenges need to accelerate the pace of consolidation.”
Japan is obviously one of those countries, and its debt cannot be resolved by economic recovery alone because it is linked to structural problems, including a rapidly graying population.
Greece has pledged wide-ranging measures to reduce its debt. On the revenue side, theses include hiking the value-added, fuel, tobacco and liquor taxes, and levying a special tax on corporations.
On the expenditure side, they include cuts to salaries and bonuses for public-sector workers, a review of the public pension scheme, and reductions in public investment and government subsidies.
Japan’s situation is different from Greece’s. Japan has a high level of domestic savings and its public sector’s net debt — after deducting government assets — comes to less than half of its gross debt. The yen is rising against both the dollar and the euro, and yields on Japanese government bonds are falling — a sign its credibility remains strong.
Which may suggest that Japan still has some time to go before it needs to address its debt problems.
However, we need to remember that the crisis in Greece was triggered by the markets’ reactions to its lack of fiscal transparency. It’s too late to do anything once the market has reacted.
The Democratic Party of Japan promised it would avoid issuing more government bonds by cutting back on wasteful spending. But the government’s actions so far show that spending cuts remain difficult where vested interests are involved.
The decline in the public approval ratings of Prime Minister Naoto Kan’s Cabinet since he started advocating for an eventual consumption tax hike indicate voters think the government must cut expenditures first before increasing taxes.
Lawmakers must of course take concrete action to review public spending and trim the number of national and local politicians, as well as public-sector workers and their pay.
But in order to pare Japan’s huge fiscal debt, it is essential that the government draft detailed plans for taking action on both revenue and expenditures.
Teruhiko Mano is chairman of the Mano Economic Intelligence Forum.