In just six months in office, Olaf Scholz hosted Sunday’s G7 summit in a time of danger to the West as rising inflation, the energy crisis and the threat of recession test the ability of the richest economies to implement a coordinated response. .
The meeting, which is also attended by the leaders of the United States, the United Kingdom, France, Italy, Japan and Canada, comes as economists around the world downgrade their growth forecasts and revise their inflation forecasts. Energy and food prices have risen since Russia’s invasion of Ukraine in February, and this month central banks have raised interest rates by a larger margin than markets expected.
“It would be impossible to imagine at the last G7 summit that we would face a similar situation,” said Holger Schmiding, chief economist at Berenberg Bank. “Things are pretty bad and they could get worse.
Terrible prospects were highlighted last week when Germany took a step closer to gas regulation after a sharp drop in Russian supplies through the Nord Stream 1 gas pipeline.
Scholz said the main goal of the summit, which took place in the luxury resort of Schloss Elmau in the Bavarian Alps, was to project unity. Leading democracies must show that they are as “united as ever”, not only 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.
Scholz will push for a “Marshall Plan” for Ukraine, a model of the American scheme that finances the post-war reconstruction of Europe. Ukrainian President Vladimir Zelensky will attend the summit via video link.
The leaders will also discuss disruptions in global food supplies caused by Russia’s blockade of Ukraine’s Black Sea ports. It was the G7’s duty 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 more difficult to meet the looming macroeconomic threats to the G7 countries themselves – a discussion that will dominate on the first day of the summit.
Helicopter AS 332 Super Puma of the German Federal Police Bundespolizei flies over Schloss Elmau © Wolfgang Rattay / Reuters
Some of the latest developments are seen as beyond the control of leaders: China’s zero-Covid policy, which is wreaking havoc on global supply chains, and the Kremlin’s reduction in gas flows to Europe, which has shaken gas markets and increased the chances of a winter energy crisis.
“It is not the G7 leaders who have caused these problems – they are [Chinese president] Xi Jinping and Vladimir Putin, “Schmiding said.
This contrasts with the Covid-19 pandemic, when governments adopted massive fiscal support and monetary incentives to protect businesses during the blockade. Then there was, said a high-ranking German official, a “simple consensus” on how to respond – “a macroeconomic response from the textbook, namely expansive monetary and fiscal policy.”
“The situation we are in now is much more complicated, much more difficult,” he added. “This perfectly clear, almost instinctive idea that you are just pursuing an expansionist policy is no longer so obvious.
This time, said Paschal Donohou, president of the Eurogroup of finance ministers, politicians will have to find a balance between supporting households most exposed to rising energy prices and taking care not to fuel inflationary pressure, a task he defined as “demanding”.
“This is a very difficult challenge for central banks and governments,” he said in Brussels on Friday. “History shows us that if inflation becomes a multi-year phenomenon at a very high rate, the challenges we face in the cost of living will only increase.
The United States is in talks with European leaders on how to ease pressure on energy prices. The focus, officials said, is on ways to prevent the G7’s restrictions on Russian oil from raising crude oil prices and increasing Putin’s export earnings.
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One answer that has long been demanded by the United States and will be discussed at the Schloss Elmau is a ceiling on oil prices paid to Russia. This will require changes to Europe’s ban on insuring Russian oil supplies: a compromise could allow countries to obtain insurance if they comply with the price cap.
But Scholz is lukewarm about the idea. On Friday, he said it was “not good” if only a few countries adhered to the oil price cap – it would only work if everyone did. “[Oil] the demand is global, “he said.” And if we fail to include all or almost all of them, then it won’t be as effective. ”
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