Europe Austerity Makes America Look Socialist

As the world’s 20 most powerful politicians prepare to jet out for talks in Toronto, the debate over whether to turn off the taps on stimulus spending continues to rage.

In the red corner (or should that be the left corner?), America and the Obama administration, claiming the stimulus cash they threw at the economy since the last G20 meeting in London is the key reason for falling unemployment and the relative health of the US economy.

In the blue corner, Europe. German chancellor Angela Merkel, French president Nicolas Sarkozy and British Prime Minister David Cameron claim only austerity can save us from a bond market - induced crisis in the wake of the Greek debt crisis.

“We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth. Without growth now, deficits will rise further and undermine future growth,” Larry Summers and Tim Geithner said in an open letter to the Wall Street Journal Wednesday.

On the other side of the pond, UK Chancellor George Osborne said that his emergency budget, that took the knife to welfare spending, will rebuild the economy.

“Our policy is to raise the ruins of an economy built on debt a new, balanced economy where we save, invest and export,” Osborne said.

2008 showed the potency of government policy but that is now changing, Charles MacKinnon, chief investment officer at Thurleigh Investment Managers, told CNBC.

No More Blind Faith

“2010 is the year when we discover the limits of government power," MacKinnon said. "The sovereign debt crisis stemming from Greece shows that the markets no longer have a blind faith that governments have the tools or the wherewithal to solve economic problems.”

MacKinnon believes investors now need to focus on one thing, a nation’s debt to gross domestic product level. This is why currency markets are so volatile, according to MacKinnon.

“Given that we are in a world of almost free floating currency, and given each individual nation's desire to inflate their way out of their debts, it will be the currencies that start to have much wider and more frequent swings,” he warned.

The problem for the G20 will be how to stop their disagreement hitting market sentiment, Stephen Lewis, chief economist at Monument Securities, said.

“In a remarkably short time, the G20 is approaching that decadent stage in its development where the negotiations are primarily over how best to agree to disagree,” Lewis said.

“This will not disguise the fact that international accord over substantive points of policy, which was a feature of global policymaking from the autumn of 2008 to the middle of 2009, has broken down,” he added.