A year ago, many hoped that the November G-20 Leaders’ Summit in Cannes would be an opportunity to state that the worst was over and that the world economy was on a solid growth path again. Leaders were expected to turn to long run issues to implement their vision of “strong, sustainable and balanced” global growth. In April, finance ministers already started a discussion of how to monitor key structural variables as a backdrop to a discussion on rebalancing global growth. Continue Reading ›
Today, it is clear that a sense of urgency over the short-term prospects of the global economy has returned. In the United States, growth is weak and the fraction of the population employed is at historical lows. The eurozone is facing an existential threat and even the German growth engine is slowing, perhaps even stalling. Japan cannot get out of a now two-decade long stagnation. And the widespread confidence prevailing in emerging markets is giving way to greater anxiety as global trade falters again and advanced country banks are recalling liquidity to their home bases. As has always been the case when anxiety mounts, there is a flight into the U.S. dollar despite America’s fiscal problems. The emerging market country currencies that are basically floating have depreciated sharply against the dollar. Brazil, a country that had been very worried about the appreciation of the real, has intervened to slow down a sudden marked depreciation. Turkey’s central bank is selling reserves. Equity markets have been down worldwide although there is a great deal of volatility and there have been rallies.
In 2009, the G-20 came together with a coherent package of macroeconomic measures to deal with the crisis. Today, the situation is quite different. First, in some countries, while a considerable amount of fiscal ammunition has been spent, the current slowdown in growth is shifting the balance of opinion against immediate fiscal consolidation. An increasing number of observers are now of the opinion that careful support to the recovery is more important than immediate fiscal retrenchment in those economies that have still preserved some fiscal space, including the U.S. Nonetheless, longerterm debt dynamics are very worrisome so there appears to be a serious fiscal conundrum. Second, today’s global economy seems to have entered a new phase characterized by heightened uncertainty over long-term growth prospects. In the current environment, there is greater talk of the need to implement structural reforms to provide an impetus to growth and to link macroeconomic policies, especially fiscal policy, with strategies to address structural weaknesses and to restore long-term business and consumer confidence rather than to discuss macroeconomics purely in terms of shortterm aggregate demand. Monetary and aggregate fiscal policy have reached their limits as countries have lost fiscal space and as the conundrum caused by the need for short-term support to the recovery, and the need for long-term consolidation remains unresolved. Therefore, it is the interaction between macroeconomic policy and structural reforms that is the topic of the essays in this volume.