By Mauro F. Guillen
The time has come for policymakers to display their political skills. The present phase of the global financial crisis cannot be overcome without a truly cooperative, coordinated set of policies around the world.
In this interconnected global economy, it is nearly impossible to avoid a serious double-dip recession if all rich economies ―burdened as they are by sovereign debt ― implement a fiscal adjustment simultaneously.
Moreover, they are facing similar problems that call for coordinated action. Otherwise, we could be permanently locked into a pattern in which insufficient demand reduces business investment, and reduced investment makes unemployment stay high, which in turn reduces demand and makes it very hard for the government to pay its bills.
We have recent precedent. In September of 1985 the G7 met at the Plaza Hotel in New York City to tackle global currency issues. President Reagan persuaded Germany and Japan to act in coordinated fashion so as to help U.S. competitiveness by letting the value of the dollar drop.
The world has changed massively since then. We no longer have a G7 that can influence global economic affairs. We have emerging economies and large global financial imbalances that benefit them. And yet the largest economies in the world need to sit at the table in order to avoid a disastrous double-dip recession.
After four years of emergency monetary interventions, and bailouts of banks, corporations and entire countries, the world has come to a situation in which there is a much smaller margin of action.
Still, the policymakers at the largest economies need to recognize that long-term fiscal stability cannot — and won’t possibly — come at the expense of the short-term stimulus measures need to get the richest economies growing again so that unemployment comes down. Economic growth is essential to restoring confidence among both consumers and investors.
A critical battleground for the economic recovery is the Eurozone. Unemployment is high. Both private and public markets for debt are highly correlated and lacking in confidence.
Sovereign debt restructurings and even the exclusion of certain countries from the common currency are being discussed. It is the time for politicians to help policymakers tackle the issues at the European level, free from concerns about the next domestic election. In Europe fiscal adjustments have been much more pro-cyclical than in the United States, thus dampening the recovery.
The last G7 summit in Marseilles was not fruitful. The recent meeting of European finance ministers — whom Geithner also attended —did not result in coordinated action either. In fact, plenty of cross-Atlantic and intra-European misunderstandings and mutual recriminations surfaced.
It is quite clear that politicians have either not grasped the harmful consequences of an increasingly bleak global economic situation or not found a way to tell their voters that decisive and perhaps unpopular measures need to be implemented, or both.
In more ways than one our present troubles involve tradeoffs between the short term and the long term: immediate fiscal stimulus to reignite global economic growth versus fiscal sustainability in the long run, and unemployment among the young versus safeguarding the retirement of an ageing population in many parts of the world. In a democracy such tradeoffs are supposed to be adjudicated through the political system.
Economic policymaking can no longer wait. Politicians from the world’s largest economies must gather support for both economic stimulus and fiscal stability, albeit with different time horizons, namely, stimulus now and stability later.
For a deal to be struck domestically among the various political forces and international among the largest economies, the commitment to long-term fiscal sustainability must be credible. Political support for these policies must be built fast, before time runs out.
Mauro F. Guillén is Director of the Lauder Institute at the Wharton School. Emilio Ontiveros is President of AFI and a Professor at Universidad Autónoma de Madrid.