Leaders of the G20 must pull back from their focus on austerity and draw up a “credible” growth strategy, former European heads of state have warned.
In a personal message to French President Nicolas Sarkozy, who chairs the G20 Summit this week, dozens of former policymakers and high-profile economists, including the former leaders of Germany, Spain and the UK, said that sorting out the eurozone’s economic crisis was an “urgent priority”.
The letter, published by the Nicolas Berggruen Institute (NBI), a German think tank, and passed to Emerging Markets, also urged G20 countries to develop a “credible global growth and employment strategy”.
The NBI’s council includes former UK prime minister Gordon Brown, who chaired the G20 at the 2009 London Summit that agreed a $1 trillion rescue package, Germany’s ex-Chancellor Gerhard Schroder, former Spanish premier Felipe Gonzalez and 35 senior policymakers and economists.
The NBI’s intervention may revive a longstanding argument within the G20, between countries that believe reviving growth should be the priority and those demanding immediate action to reduce budget deficits.
It welcomed the Brussels agreement on Greece’s sovereign debt and the “more realistic haircut” for bondholders, an increase in the firepower of the European Financial Stability Facility and bank recapitalization as “decisive, necessary and major steps forward”.
But it added: “Europe’s fiscal, banking and political crisis must also be resolved in a way that does not hamper growth prospects in the short term while putting into place credible long-term policies to reduce deficits.
“If everyone pursues austerity today, there is no way out for those with unhealthy balance sheets.”
In its statement, which was also signed by economist Nouriel Roubini, a longstanding critic of Europe’s political leaders, it said Greece would have no credible strategy to return to growth without “supportive eurozone action of some kind.
“It cannot do it alone without the exchange rate or inflation as tools. As other central banks have realized, easing credit restraint is a necessary condition for growth. That is no less true for Europe.”
This will be seen as strong hint that the European Central Bank should use its scheduled monetary policy meeting today – chaired for the first time by President Mario Draghi – to cut rates or implement a major bond-buying programme.
However most observers believe Draghi, a former Italian central banker, will be reluctant to use his first meeting to change course. “He will do all that is necessary and possible to establish himself as a tough central banker in the German media,” said Christian Schulz, an economist at German banking group Berenberg.
G20 leaders have pledged to unveil an “action plan of coordinated policies” as part of the communiqué they will issue at the end of their summit tomorrow. This will include policies to build confidence and support growth; implement, credible and specific measures to achieve fiscal consolidation and achieve greater exchange rate flexibility.
In its statement, NBI suggested that meaningful progress on these issues was vital: “Without such complementary and coordinated policies, Europe’s sovereign debt – as well as America’s mortgage debt – will continue to weigh us all down and impede any return to global growth.”