The weekend’s summit of leaders from the G8, representing eight of the world’s largest economies, appeared to mark a policy shift away from austerity measures and toward stimulating economic growth — but that could be misleading.
Much of the coverage of the meeting has cast German Chancellor Angela Merkel as the lone holdout for austerity, while other leaders, including U.S. President Barack Obama and newly elected French President Francois Hollande, move toward a focus on growth. However, there has been little from the summit in terms of concrete policy movements.
It’s not unusual for the real results of such summits to appear much further down the line, of course. Still, there appeared to be little discussed in terms of policy beyond the subject of Eurobonds, and a decision to rule out spending by governments on Keynesian-style programs.
In fact, renewed commitment by the leaders to “fiscal responsibility” and “structural reforms” looks very much like business as usual. There is still something of a hiatus in effect until the middle of June, after which a second round of Greek elections takes place and a parliamentary vote in France will reveal how much backing Francois Hollande’s party receives.
“The emphasis on growth looks something of an ‘empty promise’ when fiscal spending is ruled out as the driver for this,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets, wrote in a research note. “There’s some momentum behind the idea of project bonds which would effectively be aimed at supporting infrastructure spending. All well and good, but it is hard to see these being of sufficient scale and scope to really be held up as a savior for the euro zone crisis.”
Alistair Newton, senior political analyst at Nomura, believes that the leaders have essentially endorsed the “two-pillar” approach, combining the existing fiscal compact and a newer growth compact, which is expected to be endorsed by euro zone leaders on Wednesday. He described the G8 leaders as “Delphic” in their ambiguity — referring to the legendary Oracle of Delphi.
Greece is likely to continue to spook the market ahead of its second election, as worries about a leftist government leading the struggling Mediterranean country increase.
“(The statement) falls some way short of the sort of endorsement of continued Greek membership which might have helped reassure already increasingly nervous financial market participants,” Newton wrote in a research note. “Even if things go as well as could be expected over the course of the next four weeks, markets should expect significant event (and headline) driven turbulence with, in our view, risks skewed heavily to the downside.”