A global 'New Deal' needed
This is a tall order given the reluctance of most EU member states to cede competences to European institutions. But Europe should move more decisively in this direction. Otherwise, speculation on member states' national debt will persist, keeping borrowing costs at levels that are inconsistent with the conditions required to sustain economic recovery.
When it comes to external demand, intra-European help in the form of reflationary policies in stronger economies is unlikely to prove sufficient, owing primarily to the fiscal and political conditions prevailing in Germany. Implementing a Marshall Plan-type initiative by mobilizing EU budget resources and additional lending by the European Investment Bank to finance investments in weaker countries could be an alternative, but it lacks political support.
On a global scale, neither the US nor Japan is in a position to provide significant external stimulus. Only the emerging and developing economies of Asia could effectively contribute to lifting global demand through a coordinated effort aimed at boosting domestic consumption, which, in turn, would stimulate additional investment. Recent IMF experience suggests that, through appropriate coordination, private funds could be mobilized for big private-public partnership projects linking demand expansion with infrastructure investment.
In other words, a global "New Deal" - combining policies designed to achieve an orderly realignment of consumption and investment worldwide - seems to be required. The advanced economies should promote productivity-enhancing structural reforms with renewed vigor. The eurozone should solidify its currency union. And the emerging and developing economies should support domestic sources of growth.
For such a deal to become possible, certain preconditions must be met. First, international policy coordination by the G20 must be tightened by creating a permanent secretariat to make policy proposals and recommendations concerning macroeconomic and financial developments. The secretariat should actively cooperate with the IMF to benefit from its analysis, notably regarding exchange rates.
Second, global financial reform must proceed at a faster pace. The financial sector requires tougher regulation, strengthened supervision and internationally consistent resolution mechanisms to address the problems posed by very large, global institutions that are considered too big (or too complex) to fail. Such reform is essential if the international financial system is to mediate the sizeable resource transfers that will underpin the required changes in the structure of global demand.
Finally, a new trade pact - possibly, but not necessarily, within the Doha Round - is needed to ensure the major trading powers get access to foreign markets. This is critically important for inspiring confidence in Asian countries, which might be persuaded to favor domestic, as opposed to external, sources of demand. Moreover, trade liberalization will also increase consumer confidence worldwide.
The time is right for a new global settlement that targets growth, addresses crisis conditions in certain parts of the world and rebalances the global economy to set it back on a path of strong and steady growth.
The author, former economy and finance minister of Greece (1994-2001), is president of the Center for Progressive Policy Research.
Project Syndicate.
(China Daily 03/09/2013 page5)
