Politicians finally seem to be giving up on the Stimulus economy. 9 months ago, the leaders of the G20 Group (the world’s major economies) were congratulating themselves on having delivered “the largest and most coordinated fiscal and monetary Stimulus ever undertaken“, and claiming “it worked“.
Now, Germany, Europe’s largest economy, has announced €80bn ($96bn) of budget cutbacks. And after the G20’s recent Finance Minister meeting in Seoul, French minister, Christine Lagarde, noted that “For the vast majority, addressing finances, budget consolidation, is priority No. 1.” Even US Treasury Secretary, Tim Geithner, was in downbeat mood, telling his colleagues that “they should not rely on spending by American consumers for their economic recovery“.
The problem is that this change of heart comes rather late in the day, after $trns have been wasted on auto and housing incentive schemes. Many politicians seem to have preferred to believe the Crisis was due to lack of confidence and liquidity. But as the blog has long argued, the fundamental issue is one of solvency – too many of the debts built up in the Boom years will never be repaid. And the extra spending caused by the Stimulus programmes has made this problem worse, not better.