George Osborne to host G7 summit in UK as Washington pushes Berlin to loosen purse strings and boost domestic demand
George Osborne has warned finance ministers from the world's largest economies that they must "nurture" the global economic recovery, as the US prepared to square up to Germany over its austerity plans at a G7 meeting in Buckinghamshire on Friday.
While Osborne, who will host the two-day meeting, stressed that the countries attending have "more in common than separates us", US officials said they would use the meeting to call on Berlin to relax its stringent austerity policies and boost its own domestic demand, in response to more than three years of single currency crisis.
And in a less direct dig at the Merkel government, Washington also called for the faster implementation of the proposed banking union across the eurozone.
"Strengthening European demand is the most important immediate imperative in reviving growth in the advanced economies and thereby global growth," said a senior US Treasury official.
"Increased demand in Germany would not only provide relief to its euro area partners, but also spur the world economy. There are many ways to support demand such as by supporting faster wage growth and greater homeownership – both areas where there is space to act."
But at a conference in London on Thursday organised by the Business department, the German finance minister, Wolfgang Schäuble, said it must be the priority for governments to reduce their borrowing to regain confidence. He said the determination of Berlin to balance its budget had not only won support from international lenders but also German businesses and consumers, who felt able to invest once they saw the public finances were sustainable.
Schäuble said the focus on austerity meant a recovery was gathering pace. In a response to questions about the recession in the eurozone at the Global Investment conference he said: "The crisis of confidence is not solved, but the situation is improved. Even Greece is achieving remarkable success," he said.
Given the backlash against austerity in Europe, however, the Americans can rely on support from the French, increasingly at odds with the Germans over the euro crisis, the new Italian government, and the Spanish.
Jack Lew, the new US Treasury secretary, will demand a "recalibration" of German-led austerity policies in the eurozone. The Americans welcomed the shift in policy in Brussels and Berlin giving the French, Spanish, and Dutch more time to cut their budget deficits under the euro rulebook, but demanded more.
"The consolidation path should be stretched out in some countries, and those with fiscal space should shift to supporting demand. We welcome indications that France, Spain and the Netherlands will be given additional time to meet their budget targets, but there is room to do more in the near term," the senior official said. "The focus needs to shift to boosting demand and employment."
Christine Lagarde, who shared a platform with Schäuble and Osborne at the London conference, said the eurozone was in the bottom tier of a three-speed global recovery and was in danger of becoming a third-tier economy.
The IMF boss urged leaders to "do their homework" to find ways to promote growth and prevent the eurozone from slipping behind the US and developing nations.
Merkel's cabinet on Wednesday endorsed legislation putting the ECB in charge of supervising eurozone banks. But Berlin is hostile to further moves that would share risk and liability across the eurozone banking sector, such as pooled funds for winding up failed banks and spreading responsibility for guaranteeing savers' deposits. The latter is viewed as a no-go area in Germany while Berlin takes the view that a bank resolution system should be essentially national rather than European.
The German finance ministry has been arguing for the past fortnight that a full eurozone banking union would need a renegotiation of EU treaties, an arduous and lengthy process. The eurozone agreed in June last year to create the banking union and to use bailout funds to recapitalise weak banks directly without adding to governments' debt levels. But the Germans then delayed and diluted the policy which is to be revisited at an EU summit next month.
Washington voiced exasperation. "It is important to move forward with full banking union. Last year, European leaders vowed to break the feedback loop between banks and sovereigns, but momentum has waned," said the senior official.
"Recent events in Cyprus highlight the importance of Europe redoubling efforts toward a full banking union, including not only a single supervisory mechanism but also resolution authority and recapitalisation capacity along with a backstop for national deposit insurance, so as to build a framework for oversight and risk sharing across the euro area that matches the cross-border reach of the banking sector, restores confidence, and restarts credit."
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