G8 summit: Lessons in stimulus versus austerity around the G8
THE situation in Europe is likely to dominate the two-day talks this week, as political uncertainty in Greece fuels speculation that it could be forced to leave the Euro.
New French president Francois Hollande and his German counterpart Angela Merkel are likely to find themselves at loggerheads over the best way to lead Europe from the crisis.
Hollande (who is making his G8 debut) was elected earlier this month on an anti-austerity platform and has campaigned to introduce spending measures to encourage growth.
Merkel believes they must stick to an European treaty which enforces firm budgetary discipline.
The leaders' growth-versus-austerity debate echoes the rising discontent across the Eurozone, as poorer countries struggle to meet the treaty's exacting demands.
Nowhere is this more tangible than in Greece, where the radical Syriza party threatens to renege on the even stricter terms of an international bailout, if it gains a majority in next month's elections - a move that could force a Greek departure from the Euro.
But Hollande and Merkel would do well to listen to the advice of their fellow leaders at the summit, who have experience of both tactics - with varying success.
The US, this year's host, will be keen to ensure that these financial woes stay firmly on the other side of the Atlantic.
The Americans have turned repeatedly to financial stimulus to stimulate growth. The first move, a $158bn package of tax cuts, was signed into law by President Bush with bipartisan support.
Days after Obama's inauguration in January 2009, a second stimulus package worth an enormous $787bn was pushed through without a single Republican vote. The American Recovery and Reinvestment Act has paid out more than $755bn so far, details of which can be tracked at this website.
Shortly after, the US economy made a strong recovery, growing by 3.8% in the third quarter of 2009 and 3.9% in the fourth.
But the growth has faltered, falling to only 0.4pc in early 2011, and despite the money being pumped into the economy, joblessness continued to rise for many months.
By October 2009, it was 10pc - double what it had been eighteen months before. Only in the most recent months has it finally begun to recede.
In the UK, we have seen a very different picture. Unemployment has risen up a far gentler slope, but has doggedly continued northwards.
The most recent figures for both countries show the US unemployment rate dipping below the British rate for the first time since before the crash.
This has been an unwelcome result of the UK slipping back into recession, to the horror of the Coalition government.
While former Prime Minister Gordon Brown had embraced Keynesian ideas of stimulus - introducing a £20bn package in November 2008 - the Coalition have taken a very different tack.
Government departments were immediately asked to plan budget cuts of up to 40%, in a bid to tackle the growing deficit.
However, results have been mixed. In the fourth quarter of 2011, growth slipped into negative figures - with many warning that some of the heaviest cuts to funding and jobs are yet to take into effect.
A return to recession will have knocked Chancellor George Osborne's confidence - he had forecast growth of 2.5% by 2012 - but he has shifted blame onto Europe. “The Eurozone crisis is very serious and it’s having a real impact on economic growth across the European continent, including in Britain," he said on Tuesday.
Also around the G8 table will be two countries which have reaped very different rewards from the same tactics.
Canada has become something of a poster child for strict austerity, after the astounding success of Liberal Prime Minister Jean Chrétien's "bloodbath budget" of 1994.
When Chrétien took office in 1993, the country was in very poor economic shape. By the following year, the budget deficit was running at around 9% of GDP, and gross debt had reached more than 100% of GDP.
So Chrétien and his finance minister Paul Martin took a tough love approach, cutting goverment spending by 15% in real terms between 1994 and 1995, and from all areas - including health and education.
Thousands of public and thousands in the public sector lost their jobs.
But the risk paid off. The budget was brought back into surplus in only three years, while the booming private sector more than made up for the losses in government jobs.
But the Europeans - including Mr Osborne - should remember that the Canadian experiment took place in a completely different environment to that of today. The global economy was strong, including the neighbouring US, which boosted consumer demand.
And Canada's success was unusual.
An International Monetary Fund study looked at more than 170 fiscal policy changes in developed countries, and found that a reduction in budget deficit tends to result in reduced output and increased unemployment.
During the same time frame Japan took the opposite tack, turning to fiscal stimulus to prop up an economy battered by the bursting of a property bubble and a stock market which had dropped 60% in three years.
Over the next decade, a succession of governments spent billions on public works, loans for small businesses, income tax cuts and telecommunications projects. The many stimulus packages are well documented in this post in the Wall Street Journal.
But while the economy grew reluctantly in fits and starts over the decade, the national debt exploded from 68% of GDP in 1990 to 142% in 2000, and to 233% in 2011 - hardly an efficient use of funds.
Merkel and Hollande would be well advised, therefore, to draw heavily on the experience of their fellow leaders as they battle it out between German austerity and a new French enthusiasm for spending their way into safety.