G7 leaders lack a plan of action

The Group of Seven meeting held in Marseille the weekend of Sept. 10 provided little reassurance to the markets, offering instead vague statements from the seven largest world economies acknowledging the economic slowdown and pledging commitment to a "strong and coordinated response."

"It was a recap of the existing situation: that central bankers are prepared to cooperate to provide liquidity to the banking sector. There was no new specific action," said Pavel Mertlík, head economist at Raiffeisenbank in Prague.

The meeting focused almost exclusively on the eurozone, which was further roiled by the departure of Germany's highest-ranking official at the European Central Bank, Chief Economist Jürgen Stark, after which the euro hit a six-month low Sept. 9. Stark said he left in protest of how the bank is addressing the sovereign debt crisis by buying up Spanish and Italian bonds to reduce borrowing costs, a controversial move because some say intervening in national issues oversteps the bank's responsibilities.

The rather bland and inconclusive statements that came out of the meeting masked divisions on strategy within the group, as the United States looks to pass a $450 billion stimulus package while leading European nations continue to push fiscal austerity.

"It seems to me rather that the finance leaders in these countries simply don't know what to do and what actions should be taken to improve the global economy. It's a delicate task to stabilize the fiscal situation but to not undermine economic growth. Stabilizing the fiscal situation means expenditure cuts and tax hikes, and these are measures that don't help economic growth," Mertlík said.

"When we look at Spain or Italy, I don't think [austerity] is too conservative. Also countries like Germany and France are not in a position for fiscal expansion," he added.

Christine Lagarde, the International Monetary Fund's new managing director, used the meeting as an opportunity to back down from her previous statements about the urgent need to inject capital into European banks, saying the 200 billion euros was a "tentative amount" that could be altered after meetings with eurozone finance ministers.

More solid agreements that came out of the G7 meeting were to increase the amount of loans to countries involved in the Arab Spring by $38 billion to $73 billion, and to potentially take action in Japan to bring down the value of the yen.

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com