G8: A Very Global Equation

The next G8 summit will be held in Northern Ireland under the U.K. presidency. The leaders of the eight most industrialised nations - the United States, the United Kingdom, France, Germany, Italy, Japan, Canada and Russia – will gather for a 2-day summit on June 17 and 18. Mr. Van Rompuy, president of the European Council, and Mr. Barroso, President of the European Commission, will represent the European Union.

The European Commission’s conclusions, like those of the OECD, are that the worst of the crisis is now behind us. Financial markets also believe it: equity markets have risen strongly since early 2013 and interest rates have levelled off. Economic prospects are less bleak and growth in the G8 countries should accelerate in 2014. After contracting 0.5% in 2012, eurozone GDP is expected to contract another 0.6% this year before rebounding in 2014 (+1.1% according to the OECD). The austerity measures that were set in place have squeezed domestic demand, which is likely to remain weak this year, even though the European Commission has provided four member countries with extra breathing room to bring their deficits down to 3% of GDP (an extra 2 years for France and Spain, one year each for Belgium and the Netherlands). The Commission urges the eurozone to continue pursuing the reforms necessary to free up private investment flows (in this respect, banking union is essential) while deregulating the job market in order to curb rising unemployment.

Yet these reforms are unlikely to bear fruit anytime soon. In the short term, foreign trade will continue to be the main engine of growth. Everything depends on the growth prospects of the eurozone’s main trading partners. Yet the EMU’s big export markets are still struggling to rebound. This is true for China, Europe’s second largest trading partner (EUR 32bn) after the United States (EUR 52bn). After a growth of only 7.8% in 2012, the slowest pace since 1999, recent surveys and customs data suggest that the economic slowdown will continue, despite the stimulus measures adopted in late 2011.

Combating protectionism
Under these conditions, Germany’s decision to oppose the sanctions that the European Commission recommended on Chinese solar panel producers is a perfect illustration of Berlin’s pragmatic approach to globalisation. China is the leading market for German machine tools and the automobile industry. As a consequence, the German Chancellor, Angela Merkel, welcomed the Chinese Prime Minister by reassuring him that she would do all she could to prevent protectionist policies from taking hold. Moreover, China is about to sign a free trade agreement with Switzerland1, the first with a continental European country, and a clear snub at the European Commission, which is also negotiating with the Chinese to introduce an investment treaty mainly to provide legal protection for European investments in China. The talks are bound to be tough, as the Commission has just launched a new survey of unfair business practices in the Chinese telecommunications equipment sector.

For the moment, Europe’s relations with the United States seem to be less tense. A majority vote in the European Parliament has just approved the start of talks on a U.S./European free trade agreement, which is likely to exclude debate on cultural and audiovisual services. The European Union, and the eurozone in particular, have everything to gain. The eurozone has not lost market share in the United States and is even making new inroads. Under these conditions, the signing of a free trade agreement would be a real advantage for the region, binding itself even more tightly to the American growth engine, which is currently in an acceleration phase. The most recently released surveys indicate that the North American recovery is accelerating.

Fighting tax evasion
Lastly, the U.K. is also committed to making the fight against tax evasion a top priority for the G8. Prime Minister David Cameron will have his hands full with certain British Crown Dependencies (notably the Channel Islands and the Isle of Man, which are not part of the U.K.) and British overseas territories like the Caiman Islands, the world’s sixth largest financial centre in 2010. In the past, Luxemburg and Switzerland have repeatedly singled out this vast U.K. network of offshore investment areas as an argument justifying the preservation of bank secrecy in their domestic markets.

BY Caroline NEWHOUSE