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Economic turmoil tests G7’s ability to deliver united response

Olaf Scholz, who has only been in office for six months, will host Sunday’s G7 summit at a time of danger to the West as rising inflation, an energy crisis and the threat of recession affect the ability of the richest economies to to put a coordinated response to the test.

The meeting – also attended by leaders from the US, UK, France, Italy, Japan and Canada – comes as economists around the world are lowering their growth forecasts and adjusting their inflation forecasts. Energy and food prices have skyrocketed since Russia’s invasion of Ukraine in February, and this month central banks have raised interest rates by wider than markets expected.

“It would have been impossible to imagine at the last G7 summit that we would face a situation like this,” said Holger Schmieding, chief economist at Berenberg Bank. “It’s going pretty bad and could get worse.”

The bleak outlook was underlined last week as Germany moved one step closer to rationing gas after a sharp drop in Russian deliveries through the Nord Stream 1 pipeline.

Scholz said the main purpose of the summit, which was held at the luxury resort of Schloss Elmau in the Bavarian Alps, was to radiate unity. Leading democracies must show that they are as “united as never before”, not just in the “fight against” [Russian president Vladimir] Putin’s imperialism, but also in the fight against hunger and poverty, health crises and climate change,” the chancellor told the Bundestag on Wednesday.

In particular, Scholz will push for a “Marshall Plan” for Ukraine, modeled on the US plan that funded the reconstruction of Europe. Ukrainian President Volodymyr Zelenskyy will attend the summit via video link.

The leaders will also discuss the disruptions to global food supplies caused by Russia’s blockade of Ukraine’s Black Sea ports. The G7’s job was to “prevent a catastrophic famine,” said Scholz, who also invited Indonesia, India, South Africa and Senegal to the summit.

But a common policy response may be harder to achieve to the looming macroeconomic threats to the G7 states themselves, whose discussion will dominate the first day of the summit.

An AS 332 Super Puma helicopter of the German Federal Police Bundespolizei flies over Schloss Elmau during flight and safety training for the G7 leaders summit, near Garmisch-Partenkirchen, Germany June 23, 2022
An AS 332 Super Puma helicopter of the German Federal Police Bundespolizei flies over Schloss Elmau © Wolfgang Rattay/Reuters

Some of the recent developments are considered beyond the control of the leaders: China’s zero-covid policy that is destroying global supply chains, and the Kremlin’s reduction of gas flows to Europe, which has rocked gas markets and created the opportunity. on an energy crisis in the winter.

“It is not the G7 leaders who have caused these problems – it is… [Chinese president] Xi Jinping and Vladimir Putin,” said Schmieding.

That contrasts with the Covid-19 pandemic, when governments embraced massive fiscal support and monetary incentives to protect businesses during lockdowns. Then, said a senior German official, there was a “simple consensus” on how to respond – a “textbook macroeconomic response, namely an expansionary monetary and fiscal policy”.

“The situation we are in now is much more complex, much more difficult,” he added. “This perfectly clear, almost instinctive idea that you are only pursuing expansive policies is no longer so self-evident.”

This time, said Paschal Donohoe, chairman of the Eurogroup of finance ministers, policymakers will have to strike a balance between supporting households most exposed to rising energy prices and ensuring inflationary pressures are not fueled – a task he described. as “demanding”.

“This is a very difficult challenge for central banks and for governments,” he said in Brussels on Friday. “History tells us that if inflation becomes a multi-year phenomenon with very high rates, the challenges we face in the cost of living will only increase.”

The US has held talks with European leaders on how to ease pressure on energy prices. The focus, officials said, is on ways to prevent G7 restrictions on Russian oil from pushing up crude prices and bolstering Putin’s export earnings.

One response that has long been urged by the US and that will be discussed at Schloss Elmau is a cap on oil prices paid to Russia. It would require changes to the European ban on insuring Russian oil shipments: a compromise could allow countries to buy insurance if they stick to the price cap.

But Scholz is lukewarm about the idea. On Friday, he said it was “not good” if only a few countries stuck to the oil price ceiling – it would only work if everyone did. †[Oil] the demand is global,” he said. “And unless we can get everyone on board, or almost everyone, it won’t be as effective.”

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