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The Meaning of “Austerity”: Understanding G20 planned cuts

With the G20 announcing that austerity will reign – with efforts to cut deficits on the backs of the poor and not banks, it is important to understand exactly what it is. James Corbett of the Corbett report does a fantastic job explaining ‘austerity’ of  with this overview of what it is, how it works, who it hurts.

Banks back on offensive against G20 reform; G8 aid shortfall

Banks back on offensive against G20 reform; G8 aid shortfall

Bank lobby says no to G20 reform

I dug up this nugget from a couple of weeks ago – it seems that banks are back on the offensive – despite having caused the economic crisis.

The Institute of International Finance (IIF), a bank lobby group representing over 400 companies, said “a need to hold more capital, pay more taxes and other possible reforms could hit economic growth hard.”  Thus, they urge the G20 to back off on regulation and reform. Convenient.

The G20 has certainly left the door open for this.   It’s reorientation towards deficit cutting to satisfy financial markets, as well as the waning of G20 discussion of the bank tax, are both indications to financial institutions that they are in the drivers seat and might as well start driving.  The banks know that G20 governments are already on their side and willing to give them what they want.

This is all very troubling, and says a lot about the extent to which we are held hostage to those that created the economic mess in the first place.  If reform of any kind will hurt growth, doesn’t that mean we have set up a system in which we are handcuffed from doing anything that banks don’t want?  Isn’t it time for a fundamental rethink given the deep crisis that the banks put us in?

There were dissenting voices at the conference where the IIF made its push against reform.  “We find ourselves in a situation eerily reminiscent of the 1930s,” billionaire U.S. investor George Soros said. “Many governments have to reduce debt under pressure from financial markets. This is liable to push the global economy into a double dip.”

G8 countries have fallen $10B short of commitments: report

The report from Oxfam said the Group of Eight countries account for about 70 per cent of official development assistance, suggesting the G8 share of the $10-billion shortfall from 2005 summit pledges in Gleneagles, Scotland, is about $7 billion.

Given circumstances, there is a deep need for this aid, as it represents, in the words of Oxfam’s Mark Fried,”vital medicines, kids in school, help for women living in poverty and food for the hungry”

Calls for the aid must also come with demands for economic justice and autonomy. Trade and investment rules are stacked against the poorest countries of the world and then the G8 actively works to undermine self-sufficient initiatives puts forth by southern countries.  Then they offer aid where they get to fully control the agenda and use it for political purposes (‘you want aid, do this…’). And they can’t even fulfill those aid commitments.

Cut, cut, cut – then tell the market, says G20

Cut, cut, cut – then tell the market, says G20

Organization for Economic Cooperation and Development says money is ‘gone’

It is becoming more and more clear what G20 financial reform looks like – punishing cuts to the poor and middle class and obedience to the banks.

As I wrote on a few days ago, the G20 has decided to focus its energy at the Toronto summit on pressuring member nations to implement deficit cutting and fiscal austerity through deep and painful budget cuts.

This move to austerity is about maintaining investor/market confidence at all costs.  The head of the Organization for Economic Cooperation and Development, Angel Gurria, warned the world’s economies to “make sure that you give signals to the markets about fiscal consolidation.”

Translation: countries need to start slashing spending and then pronounce it publicly and immediately to ensure investors hear it.  This is expected to calm markets and boost growth, despite much evidence to the contrary (for example here, here, and here)

Canada, of course, was right in on the action: “We’ve pushed hard for those countries that need to fiscally consolidate in Europe to get on with it and to demonstrate their resolve” said Canadian Finance Minister Jim Flaherty.  The Bank of Canada is on-board as well.

Gurria further claimed that all the (public) money is gone. Thus, all we can really do is start cutting and becoming more ‘flexible’ (ie: crushing unions, increasing temp and precarious work to fix market needs), and making the world ripe for the markets:

“Countries need flexibility in labor markets, exchange rates; they need structural adjustment policies like competition, education, innovation,” said Gurria. “These are the things that are going to make the recovery hold, because you can’t hold it up with public money any more. It’s gone.”

And where did the public money go? To bank bailouts, to housing bubbles, to tax cuts for the rich, to corporate subsidies, etc… and now we get to pay for all that.

Bank levy setback: G20 Finance Ministers say no in S. Korea

Bank levy setback: G20 Finance Ministers say no in S. Korea

Proponents of the global bank levy tax (distinct from the Financial Transaction Tax or ‘Robin Hood Tax’-background here-which was already off the G20 table) suffered a major setback this past weekend in Busan, South Korea. The G20 finance ministers decided to drop the tax, under pressure from its chief opponent, the Canadian government, as well as Australia, Japan, and Brazil.  The decision was based on the usual argument that the levy would punish banks that had acted responsibly, and that other mechanisms such as increased capital requirements were more appropriate for dealing with future bank crises.

The pronouncement does not preclude countries from creating their own bank tax, and the G20 has stated that it is even willing to provide institutional support for countries to do so. However, without the buy-in across the board that a G20 agreement would have provided, it is difficult to see how a bank tax within one nation could work.  If taxed with in a given country, banks would have an incentive to begin shifting investment towards those countries that rejected the tax.

Instead, the focus must continue to be on building the global tax across the G20.  It is possible it will be discussed at the November G20 meeting in South Korea, especially if, rather than folding from this setback, civil society continues to amp up the pressure.

Instead of accepting defeat, activists can use this time before the Seoul summit to clarify issues and address concerns that were raised in the past few of months. Public awareness of both the levy and the financial transaction tax has increased significantly, and it moved further up the G20 agenda than anyone could have imagined even a year ago. Though the bank tax has been dropped off the agenda for the Toronto summit, the fight will continue.

One additional thought, and this is all speculation.  It seems to me that the levy probably never had any chance of passing at the G20 meeting in Toronto, but that the debate served at least two purposes for the G20 leaders.

First, Canadian Prime Minister Stephen Harper can say he was a strong crusader for Canada, was up against much opposition, stuck to his principles, and then won against all odds!  The papers even wrote about it in this manner – as a victory for Canada [though it actually isn’t].

Second, the UK and French governments, under great pressure from their electorate to do something about the banks (and dealing with a much stronger bank tax movement), can say they fought hard and fought to the wire, but were unable to convince enough countries to join them to get the bank tax going.  They look good, and can now get at the business at hand: gutting social spending and fighting deficits at all costs.  The UK’s David Cameron already began the process this week.

Again, this is speculation and I will dig for more info, but it makes some sense, no?

More bank tax background here

[Photo from:]

Bank tax & the G20 [Part II]: Canada’s ‘responsible’ banks

Bank tax & the G20 [Part II]: Canada’s ‘responsible’ banks

[continued from Part I]

[PDF of full article]

Is Canada really an inspiration for the world’s troubled banks?

A great deal of Canada’s authority on these bank tax issues is based on the perception that the country’s traditional banking sector was able to withstand the financial crisis. The historical record is murkier – there is much more to the story than mainstream media accolades of bank prudence and wise Conservative government policy.

In the late 1990s (and again in the early part of the new millennium) the five Canadian banks aimed to merge into three institutions to obtain the capital base to compete internationally with banks such as Citigroup, UBS, and Royal Bank of Scotland. They hoped to enter the “major leagues” of investment banking and non-traditional speculative banking: the very markets that were at the heart of the crash. The banks were unsuccessful in their quest, as the Canadian government blocked the mergers.

Many critics have argued (here and here, for example) that it was not a prudent fear of systemic risk, or the Liberal government’s foresight that stopped the mergers. Rather, it was news of the banks’ ambitions and public outcry about branch layoffs and closures and increased service charges that forced the Canadian government’s hand, pushing it to block the banks from joining together. Canadian financial elites and the business class harshly criticized the government.

Yet it may have been fortunate for bankers, and the current government, that the Canadian public was not swayed. Otherwise, Canadian banks likely would have needed a US or UK style bailout in the 2008 crisis.

According to political commentator Murray Dobbin, the current Conservative government actually has offered a great deal of money to banks in the past two years, and he questions whether this was a form of bailout in itself. The Canadian government spent $70 billion to buy up risky mortgages from the big five banks (Dobbin wonders, if Canadian banks are so wonderful, why does the government need to buy these mortgages?), created a $200 billion fund called the Emergency Finance Framework to insure banks when they need it, and currently ensures 100% of all mortgages through the Canadian Mortgage and Housing Corporation – eliminating risk for banks.

The fiscally sound Canadian bank appears to be more fable than fact.

US position key

Unsurprisingly, the US position leading up to the June G20 meetings is likely to be a major determinant of the success or failure of the G20 bank tax talks. The enormous US bank bailouts have made it difficult for the US government to point to their strong financial sector as a reason to oppose bank taxes. Nevertheless, the US, ever averse to taxation of any kind, has also come out strongly against the Tobin tax and has reacted ambiguously to the idea of an international bank levy.

On the other hand, the Obama administration has made public statements over the last few months about a domestic bank levy proposal. This may lead the US to be more open to an international levy given that it would shield them from capital flight if all nations bought in.

Conclusion: is consensus on a bank tax possible at the G20?

Because consensus is required for G20 policy decisions, the growing Atlantic divide leaves any tax or levy plans up in the air. Meanwhile, the positions of the other 15 G20 countries are still being developed and do not seem to be getting much attention from the major players.

Though tax watching might seem like a dull sport, it is worth observing the developments both during Harper’s trip to Europe this week and this June at the G20 summit. The European powers backing these taxes have been shaken by the crisis and pressured by their electorate to do something about the banks. The taxes are not radical solutions to more fundamental systemic problems, but at least they point in the right direction: towards the banks.


Darren Puscas is the editor of the G20 newsblog He is currently a researcher on a multi-country project on women and unionization at McMaster University in Hamilton, Ontario. He lives in downtown Toronto, not far from the summit fence.

[This is an updated version of a bank tax backgrounder that first appeared in The Dominion in its Special Issue on the G8/G20]

–> Further information on the bank tax at G20 Breakdown

–> Plug-in to the campaign against the tax

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