What the world must do to boost growth
By Tim Geithner
The world economy is in the midst of the second slowdown of this recovery from the financial crisis of 2008 and 2009. The question is not whether we have the economic or financial capacity to act to strengthen growth, but whether we have the political ability to do the right things.
The shocks behind the slowdown – oil prices, Japan's disaster, the crisis in Europe – are severe enough to have been dangerous even if they had happened during a global boom. They are more dangerous now because they hit a world still healing from financial crisis and because of the general fear that political constraints will prevent governments and central banks from acting sensibly with the tools available.
With interest rates very low in the major economies, budget deficits swollen by the crisis, and the financial imbalances of the crisis only partly resolved, there are limits on what policy can do to help strengthen growth.
But the biggest constraints on action in the major developed economies now have less to do with those economic realities and more to do with political paralysis, misplaced fears about inflation and moral hazard, and unwarranted disaffection with the efficacy of the traditional fiscal tools of tax cuts and investment to encourage growth.
The three most important things that have to happen for the world economy to regain momentum are these. First, the U.S. should act to strengthen growth and employment. President Barack Obama will push for the very substantial package of public investments, tax incentives, and targeted jobs measures he will put forward tonight, combined with a carefully balanced mix of fiscal reforms designed to restore fiscal sustainability over the medium term.
Second, Europe needs to take more forceful action to generate confidence that it can and will resolve its crisis. This requires governments working together and alongside the European Central Bank in an unequivocal commitment to support Europe's financial system and ensure governments can borrow at sustainable interest rates as they reform. Finally, China and other emerging economies need to continue to strengthen domestic demand and allow their exchange rates to adjust to market forces.
In early 2009, the world showed remarkable unity and deployed remarkable financial force in rescuing the global economy. The challenges now are different and cannot realistically be confronted by a repeat of that coordinated global response of financial stabilisation and fiscal and monetary stimulus.
But the imperative remains to strengthen economic growth. Fiscal policy everywhere has to be guided by the imperatives of growth. Where deficits and interest rates are too high, governments have no choice but to consolidate. Where fiscal positions are stronger and interest rates low, some countries have room to take more action to support growth, and others can at least slow the pace of consolidation. Where more fiscal reforms are necessary to achieve long-run sustainability, the emphasis should be on policy changes that take effect over the medium term.
As for monetary policy, with growth slower and oil prices lower, inflation risks are on average, though not everywhere, less acute. This means some central banks will continue to ease policy, while some will keep rates lower longer and slow the pace of expected tightening. None of the major central banks are out of ammunition. The repair and restructuring of financial systems has to be accelerated where it has lagged. Countries that forced more capital into their banking systems early in the crisis are better placed to support the recovery. Those that did not should move more forcefully now.
Financial reforms designed to prevent the next crisis need to be designed and implemented in a way that does not exacerbate the slowdown. We need more progress in rebalancing global demand, with broader and faster appreciation of the remnimbi and the other policies necessary to strengthen domestic consumption in China and other emerging economies with large external surpluses.
The outlook is not all dark. Oil prices have eased somewhat, relieving pressures on consumers and businesses. Growth in emerging markets remains quite strong. Most private forecasters expect U.S. growth to be stronger in the quarters ahead than during the first half of this year. The IMF expects the world economy as a whole to continue to expand at a moderate pace.
But the risks of a longer period of relatively weak growth are significant, and it makes sense for policy makers to act to reduce the risk of that outcome. One of the most important lessons from the history of financial crises is that the political will to act to secure recovery fades too quickly in the face of the political costs of the initial response and early optimism about growth. This was a terrible crisis. Recovery was always going to be slow, fragile, and take time. We have more work to do. We are better off doing it together.
The writer is US Treasury Secretary
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