Stalemate Baffles Bank Policymakers
Washington — Topic A, the core agenda for world leaders, has become clear: how to fill the economic middle with jobs that can put Europe back to work, get incomes climbing in the United States and absorb a bulge of young people in parts of Asia and the developing world.
But deep into the world’s financial crisis response, and as officials wrap up annual spring meetings of the International Monetary Fund and World Bank, there is no consensus on how to proceed. Europe remains locked in a feud over more spending in hopes of job growth vs. austerity and the potential for growth later. The U.S. fiscal policy debate seems deadlocked. Developing nations are growing, but struggling over how to fix a massive infrastructure shortfall that could crimp their ability to build a large enough workforce in the future.
The world enjoyed the Great Moderation through years of growth, then endured the Great Recession. Now, welcome to the Great Stalemate.
“What’s the next step? How do you stimulate the real economy? No one seems to have a good answer,” said Changyong Rhee, chief economist for the Asian Development Bank and a close observer of the debate over world economic policy. “Economic theory has its limits.”
There was been little in last week’s meetings of the IMF and World Bank to suggest progress. The IMF has shifted gears over the past three years and now agrees that Europe should ease its austerity drive — at least in the countries that can still borrow such as Germany and Britain— and do more for short-term growth. There’s been little response. If anything, the euro zone seems more bogged down. The broad statements coming from groups such as the IMF imply that there’s a solution out there, somewhere.
Domenico Lombardi, a former member of the IMF executive board and now director of the global economy project with the Centre for International Governance Innovation, said he regards those public statements as “a diversion” from the fact that there is a fundamental disagreement among and within nations about how to proceed.
In Europe, the pro-austerity clique centered on Germany and the more successful north remains entrenched, leaning against any short-term assault on joblessness, Lombardi said. In the struggling southern European nations, reforms needed to improve economic performance are lagging — meaning there’s not enough preparation for what might create jobs down the road.
The United States, from the IMF’s perspective, is moving too fast to reduce its deficits with the sequester. Along with other measures, that is forecast to cut about 1.8 percent from the nation’s economic output this year. At the same time, the fund argues that the United States is doing too little to fix its long-term entitlement spending problems — potentially suppressing growth in the future.
Central banks have stepped in to fill gaps around the world with a massive boost in the money supply — but even that has had a muted effect on jobs. The hope is for an eventual central bank “handoff” or exit as economic conditions return to normal.
But when? And to whom? Political decisions have not been made.
Central banks “cannot be the only game in town,” IMF Managing Director Christine Lagarde said last week in urging policymakers to speed action on a core set of unresolved issues such as creating banking union in Europe or a sensible debt and spending strategy for the developed world. “There has to be other players putting in place the right policies.”
Job growth was at the top of the agenda last week in a separate session of officials from the Group of 20 top economic powers. Russia, the current chair, wants an investment pact. But a group communique issued Friday makes no new proposals on that front.
Others want global debt standards to clarify what the rest of the world can expect from heavy borrowers such as Japan and the United States. But debt is an increasingly contentious issue. Academics spar over whether certain levels of debt lead to lower economic growth — a major study to that effect has come under question — or whether sovereign borrowing even matters for countries like the United States and Japan. The result: The G20 compromised on developing “soft parameters, strategic objectives which might be amended or adjusted as each nation needs,” Russian Finance Minister Anton Siluanov said.
That’s not strong enough to have much effect on debt dynamics. It’s not loose enough to clear the way for major new spending to attack the immediate jobs issue.
Mexican Finance Minister Luis Videgaray said that while his country has achieved some economic success, it remains tied to the United States, and so he is hoping for some resolution as the major nations of the world continue to spar.
At the peak of the crisis, the easy consensus was “avoid a collapse,” he said in an interview. “Today it’s a balancing act.”