07/06/2010 11:41 am ET | Updated May 25, 2011

The G8: The World Economy's Biggest Brake

If it's true that the economies of the EU and US are headed for a double dip, what will put them into a second recession is exactly what got them out of the last one.

Only a year ago, G8 leaders were congratulating themselves as their coordinated stimulus packages jointly lifted their economies out of the worst recession of the postwar period. A year later, at their recent summit in Toronto, that virtue has suddenly become a vice. They have all pledged to halve their deficits over the next three years, some through brutal budget cuts.

The problem, of course, is that precious few of those economies could survive without fiscal life support, let alone swim upstream against a torrent of huge budget cutbacks. Of late, the major Western European economies have hardly grown at all, and even those economies that have seen a modest recovery, like the US's, now show widespread signs of weakness, just as many of President Obama's stimulus measures are about to run out of gas.

Energy- and resource-rich member states like Russia and Canada are the exceptions, benefitting from the ongoing industrial revolutions in China and India, and the lift they give to commodity prices. (If the OECD still accounted for three quarters of world oil consumption, as it did in the mid-1990s, would oil still be trading at over $70 per barrel?)

Simply turning off the stimulus tap risks halting economic growth in most developed economies today. But clobbering yourself with the type of austerity budgets passed in the UK and Greece is a sure-fire way to get your economy shrinking in a hurry. In the UK's case, the budget will take out as much as 6 per cent of GDP over the next three years, including a 2 per cent cut next year. Greece has pledged even more, sacrificing a tenth of its GDP on the altar of deficit reduction.

How long governments can stick to this scale of fiscal austerity remains to be seen. Bond markets should rightly question their staying power once the economic toll starts to show where it really counts--job losses. But at the same time, growth-snuffing fiscal action may not cure budget deficits as readily as bond traders expect.

Another recession's hit on on tax revenues could overwhelm the impact of even the cruelest of spending cuts, leaving your bottom line no better off, and possibly even worse. And the chances of your economy being bailed out by strong consumer demand abroad fades with every trading partner who takes the same fiscal path you have chosen.

It looks more and more as though the G8 nations (or at least the core G6, excluding the petro-states of Russia and Canada) will become stagnant economies hauling huge fiscal burdens. What was once the engine of global economic growth is now its biggest brake.