Another global divide: the boomers and the busted
Angela Merkel, chancellor of Germany, has called on the other G-20 countries to support a financial transaction tax to be imposed. This, she says, will help bring stability to the world’s financial volatility.Canada has already begun lobbying against the tax. Why is it opposed? Because its economy has been among the least affected by the global financial crisis.
Berlin may want to bash its banks and raise money to ease its public debt. Ottawa doesn’t want to do either.
During the advent of the crisis, all governments were in the same boat. They were worried about collapsing demand, declining trade and so on. Policy coordination was easy.
Now the game is different. Those economies that went bust during the crisis are worried about the levels of government debt, how to keep demand up and fear the financial markets. Those that are still booming are worried about inflationary pressure, surges in capital flows and don’t see their financial sectors as a problem.
Welcome to the new global divide.
India is broadly on the side of the boomers. It may have high levels of government debt, but these are largely owed at home and revenues are healthy thanks to eight or so per cent growth. Its financial sector, partly state-owned and very old fashioned in its accounting norms, has weathered the crisis almost untouched.
If anything, India actually increased the scope of credit default swaps and other exotics because its firms needed better means to hedge against volatility.
With the eurozone still walking on economic eggs, it is no surprise that these governments are leading the charge for market restrictions.
Attacking supposed speculators and other Shylock types, it diverts attention from the governments’ failures to control their debts and increase their competitiveness.
The boomers should also be making demands on the busted. The latter are flooding the system with cheap capital and bleeding red ink. Many emerging economies are now facing huge and destabilizing capital flows into their economies because of this.
It makes little sense for India to tax its financial transactions. This would only add a burden to its financial sector that it does not need. Its banks and insurance companies already have to buy huge amounts of government bonds – this makes them safe but also uncompetitive. To also add Merkel’s folly to their burden would simply further cripple India’s financial sector.
This doesn’t look good for the G-20 which will find itself divided between the boom economies and the broke ones in the coming months as it tries to formulate policy responses to the present crisis.
Mind you, Merkel’s move is likely to come to nothing. She herself is only pushing it because it’s a way to win the opposition Social Democrats to support a bailout payment for Greece and the rest.
After that, one suspects her interest in the cause will wither away.