Opinion When East meets West

Leading EU nations like Germany and France,on whom the burden of bailing out the smaller economies has fallen,say the EU’s top priority should be addressing the problem of high budget deficits which have caused the sovereign debt problem. President Obama has a different take on this. In the run-up to the G-20 meeting,he has warned the EU it should not be excessively obsessed with the problem of high government debt. Instead it should remain focused on sustaining the global recovery as the highest priority. Budget deficits can be addressed once the world output growth returns to its long-term median growth path. On this issue India is closer to the Obama position.

Finance Minister Pranab Mukherjee had articulated a similar stance at a meeting of G-20 finance ministers in South Korea recently. India too,like the US,fears that Germany could usher in a double dip recession if it takes any drastic step resulting in the contraction of the EU economy.

However,India has differences with both the US and EU on some other critical matters relating to the governance of global financial institutions. There is a growing consensus in the EU and US that the financial sector,which received massive bailouts from taxpayers’ money,must now start paying back the government in the form of a tax on all transactions executed by it. The exact form of this tax on the financial sector is not discussed yet. But this proposal,which has gained significant political support in Germany,France and the UK,also seems to have Obama’s blessings.

With crucial elections to 36 out of 100 seats for the US Senate scheduled for early November,Obama too is believed to be under severe political pressure to demonstrate that he has the courage to make Wall Street pay for its sins,especially after bailing them out heavily with taxpayers’ money in 2008-09. He has already come up with a tough plan to regulate the financial players on Wall Street. The problem is,if both America and the EU agree on some tax on the financial sector,then the G-20 will certainly insist the measure be adopted by all countries so that there is a level playing field for all economies trying to attract global capital. For instance,if some nations do not impose a financial transaction tax,they will naturally become more attractive destinations for global capital. So the EU and US will certainly insist India and China also agree to the principle of an overarching financial sector tax if there is some agreement among OECD nations.

India will have a difference of opinion on this. India can justifiably argue that its own financial sector was very well regulated before and after the global financial crisis. Since the government did not bail out the financial sector with taxpayers’ money,a case cannot be made out for the financial sector paying back the government in the form of a special tax. In fact,if anything,India could argue that India’s banks were part of the solution to help revive the domestic economy. Public sector banks have delivered bailouts in the form of Rs 60,000 crore of rescheduled loans to leading Indian companies that got into trouble after global credit froze in 2008-end. Similarly,China could also argue that the banking system there actually helped revive the economy through an extraordinary credit boom.

So the emerging economies within the G-20 will certainly have a different take on the issue of imposing a tax on the financial sector. The point is,emerging economies have a different set of problems,and therefore need a different set of solutions. G-20 will have to recognise this.

The other big issue on which major differences could crop up is America’s penchant to blame all its problems on a “highly undervalued yuan”. The joke in the West these days is,if you are generally depressed,you can blame the yuan! The Chinese are very sensitive about this and have already warned G-20 nations not to make the yuan a bone of contention. However,the Chinese too are very pragmatic and therefore have made a general declaration that they will make the yuan more flexible in the future. Western economists reckon it is about 40 per cent undervalued and is therefore the cause of the current imbalance in trade between the US and China. The Chinese,of course,retort by saying Americans need not indulge in over-consumption of Chinese goods just because they become very cheap on account of an undervalued yuan. Besides,they argue the Americans should not complain as they are consuming with money borrowed from China year after year!

This,in simple terms,is the crux of the ongoing global imbalance that the G-20 wants to address. However,too much consumption in the West and too much savings in the East must have deeper cultural/ behavioural roots which some 20 heads of state will certainly not be able to fathom and resolve in a jiffy.

India’s position on the West forcing China to revalue its currency will have to be nuanced. Tomorrow the same pressure can come on India as the productivity of its economy grows much faster relative to the West and the rupee is suddenly perceived as highly undervalued. After all,the rupee moves on the basis of a “manage float”.

Generally,the East-West divide within the G-20 is bound to increase in the future.

The writer is Managing Editor,‘The Financial Express’

mk.venu@expressindia.com