Fiscal Adjustment Set as Top Priority from G20

The G20 summit in Toronto was highly anticipated due to the vast number of threats the global economy is currently facing. China’s move, days before the summit, to slightly appreciate its currency (yuan) was a good warm-up for the summit as it cleared the road for a more constructive discussion focused on more crucial and urgent issues like EU’s fiscal crisis and the financial markets regulation.

Prior to the summit, the US government had asked from Europe not to de-escalate their fiscal spending as this would jeopardize global economic recovery. Response from Europe was negative as fiscal adjustment is the unambiguous top priority of the EU member states. It’s definitely not the time for Europe to be a big spender. Fiscal discipline is far more important as it influences other areas like the the ‘free-falling’ euro and credit spreads (cost at which countries borrow).

USA has to wait a bit more for Europe to match them in the ‘spending gear’. The kind of measures countries will adopt to tackle their fiscal crisis will be different for each of them given the heterogeneity of their economies and dissimilar scale of the crisis in each of these countries. Germany and the UK have been the main advocates of this effort to postpone government spending and make sure that fiscal crises do not spread out to other EU countries.

Europe’s firm stance on curbing the fiscal crisis is really promising as it fashions patience, long-term thinking, and solidarity. The EU oughts to first restructure its domestic affairs and then gear its economy up. The situation could go out of hand, should the EU decide to focus on expansionary fiscal policies and neglect its uncontrollable deficit. On other news from the summit, the G20 ‘froze’ the prospect of implementing an ‘international bank tax’ but committed on gradually setting stricter bank capital requirements from the late 2012. Isn’t that the year the world is supposed to come to an end?!