Published: Wednesday, 30th June, 2010 4:35pm

Toronto gathering does little to soothe market crisis facing Ireland

Pic by==: 97

Ireland and Portugal and the smaller European countries may pay dearly for the decisions leaders of the world's 20 largest economies have agreed at their latest get-together.

More precisely, the G20 leaders meeting in Toronto last weekend agreed to do very little. They agreed to disagree about the best ways to ease the world economy out of its economic and banking crisis. Angela Merkel's Germany, and Britain, under the newly elected David Cameron, not surprisingly endorsed their own plans for austerity budgets.

The two European leaders had already decided, for different reasons of urgency, to cut their government spending. President Barack Obama had urged his fellow members of the G20 leaders' club to defer spending cuts and to continue instead to boost economic growth in their respective economies. Later this year, Obama's presidency faces its first difficult mid-term electoral test. He needs the US economy to start generating jobs.

Britain, nursing one of the largest budget deficits in the world, has no such option. Frightened by the prospects of a market crisis, Cameron has gambled on an austerity budget that loads many of the cuts over the next two years. That is a sure sign that the Cameron coalition is not heading for a new election anytime soon. Because their economies are in better shape, Germany and France ahead of the Toronto gathering, had much greater room. Instead, Merkel, apparently reflecting German voters' fears about paying for the debts of other eurozone members, has also endorsed a milder version of austerity.

Germany and France face very little pressure from the markets. Their debt service costs are among the lowest in Europe. Despite the fall in the euro, investors still want to buy German and French sovereign bond debt because they believe that the bond paper will hold its value. High demand for their bond paper inversely pushes down the annual interest rates that the markets demand Germany and France pay to raise new debt.

As anchor tenants of the eurozone, Germany and France can mildly cut back their budgets and enjoy paying very low interest payments to service their sovereign debt piles. This is not the case for some of their fellow eurozone members. Ireland and Portugal are struggling to control their budget deficits. The debt markets are sceptical, despite Ireland's huge efforts to rapidly slash its spending. More and more Government revenues will need to be earmarked to service the national debt.

Key Irish sovereign interest rates, at 5.5 per cent, are already at dangerously high levels. More austerity and more spending cuts will no longer help to ease the markets' concerns. The G20 summit in Toronto will arguably increase the pressure on smaller indebted countries, putting Ireland and Portugal at the mercy of the markets.

Quite often, gatherings of the leaders of the world's largest economies end up leaving observers scratching their heads. Why did the leaders of the so-called G20 travel all those distances to produce so little? The photo opportunities for electorates back home are obviously a leading draw. The world should be a better place if the leaders meet regularly. It is an interconnected world.

By Sunday night, the leaders had issued a communiqué of over 10,600 words. A self-congratulatory preamble set the tone for a depressing outcome for smaller countries like Ireland struggling with debt piles. "In Toronto, we held our first Summit of the G20 in its new capacity as the premier forum for our international economic co-operation," said the world leaders. "Building on our achievements in addressing the global economic crisis, we have agreed on the next steps we should take to ensure a full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced global growth.

"Our efforts to date have borne good results. Unprecedented and globally co-ordinated fiscal and monetary stimulus is playing a major role in helping to restore private demand and lending. We are taking strong steps toward increasing the stability and strength of our financial systems. Significantly increased resources for international financial institutions are helping stabilise and address the impact of the crisis on the world's most vulnerable. Ongoing governance and management reforms, which must be completed, will also enhance the effectiveness and relevance of these institutions. We have successfully maintained our strong commitment to resist protectionism."

The upbeat tone does not last for long, however. The communiqué adds: "At the same time, recent events highlight the importance of sustainable public finances and 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. Those countries with serious fiscal challenges need to accelerate the pace of consolidation."

In short, Cameron got the international support he needs to sell his austerity budget to his voters back home. Germany and France will do their own mild versions of austerity. And the US will do its own thing to boost its economy. For countries like Ireland, whose economy is not big enough to get a place at the G20 table, the Toronto summit of the big boys and big girls is not particularly good news.

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