Just six months in office, Olaf Scholz hosts Sunday’s G7 summit at a time of danger to the West, as rising inflation, an energy crisis and the threat of recession test the capacity of richer economies to deploy a coordinated response.
The meeting, which is also attended by leaders from the United States, the United Kingdom, France, Italy, Japan and Canada, comes as economists around the world lower their growth forecasts and revise their inflation projections. . Energy and food prices have risen in a spiral since Russia’s invasion of Ukraine in February, and this month central banks have raised rates by higher margins than expected markets.
“It would have been impossible to imagine at the last G7 summit that we would be faced with a situation like this,” said Holger Schmieding, chief economist at Berenberg Bank. “Things are pretty bad and could get even worse.”
The desperate outlook was underscored last week when Germany took a step closer to gas rationing after a sharp drop in Russian deliveries via the Nord Stream 1 pipeline.
Scholz said the main goal of the summit, held at the Schloss Elmau luxury resort in the Bavarian Alps, was to project unity. Leading democracies must show that they are as “united as ever”, 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.
Scholz will remarkably push for a “Marshall Plan” for Ukraine, inspired by the American scheme that funded postwar European reconstruction. Ukrainian President Volodymyr Zelenskyy will participate in the summit via a video link.
Leaders will also discuss global food supply disruptions caused by Russia’s blockade of Ukraine’s Black Sea ports. It was up to the G7 to “prevent catastrophic famine,” said Scholz, who has also invited Indonesia, India, South Africa and Senegal to the summit.
But a common political response may be more difficult to achieve in the face of imminent macroeconomic threats to the G7 states themselves, the discussion of which will dominate the first day of the summit.
A German Federal Police Bundespolizei AS 332 Super Puma helicopter flies over Schloss Elmau © Wolfgang Rattay / Reuters
Some of the recent advances are seen as out of control by leaders: China’s zero-covid policy wreaking havoc on global supply chains and the Kremlin’s reduction in gas flows in Europe, which has shaken gas markets and increased the probabilities of the energy crisis in winter.
“It is not the G7 leaders who have caused these problems, yes [Chinese president] Xi Jinping and Vladimir Putin, “Schmieding said.
This contrasts with the Covid-19 pandemic, when governments adopted massive fiscal support and monetary stimulus to protect companies during blockades. Then there was, said a senior German official, a “simple consensus” on how to respond: a “text macroeconomic response, that is, an expansionary monetary and fiscal policy.”
“The situation we are in now is much more complex, much more difficult,” he added. “This completely clear, almost instinctive idea that you just pursue expansive policies is no longer so obvious.”
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 taking care not to intensify inflationary pressures, a task he described 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 very high rates, the challenges we face in the cost of living will only grow.”
The US has held talks with European leaders on how to relieve pressure on energy prices. The focus, officials said, is on ways to prevent G7 restrictions on Russian oil from raising crude oil prices and increasing Putin’s export earnings.
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A response that has long been pushed by the US, and will be discussed in Schloss Elmau, is a cap on oil prices paid in Russia. It would demand changes to the European ban on insuring Russian oil shipments: a compromise could allow countries to obtain insurance if they observe the price cap.
But Scholz is lukewarm with the idea. On Friday he said it was “not good” for only a few countries to meet the oil price cap; it would only work if everyone did. “[Oil] the demand is global, “he said.” And unless we can incorporate everyone, or almost everyone, it won’t be as effective. ”