Associate Fellow, Chatham House and Fellow of Wolfson College, Oxford
Aggressive fiscal and monetary policies – and widespread bank intervention – have stabilised the global economy. But it is far from clear that policy-makers have an exit strategy, or a new growth model to exit to. This is not just a challenge for the US and China: the upcoming G8 at L’Aquila should focus sharply on Europe’s crucial role.
The IMF’s last WEO paints a worrisome picture of the medium-term outlook. Global growth recovers, but imbalances (between 2009 and 2014) are barely changed. China’s surplus just continues, as does that of newly industrialised Asia, while the US continues to run a current account deficit of 3 percent of GDP. But if that means a recovery driven substantially by US domestic demand and Chinese exports, the risks are obvious. With the euro area adjusting very slowly, and with China keeping a strong competitive edge, then US policy-makers may repeatedly defer any monetary and fiscal exit strategy. And protectionist pressures are likely to mount.
Avoiding this requires co-ordinated action by the key global actors. In the case of the US and China, the need for co-ordination is obvious. And attention at the time of the London Summit focused a lot on the G2. But this is one short of a quorum. There is no viable exit from the global crisis without an active European role.
The G8 may seem less relevant these days than the G-20, but here is an agenda that it can (and must) help shape, starting at L’Aquila: the role of Europe – in partnership and counterpoint with the United States – in achieving effective policy co-ordination and in reforming global governance.
Managing a sustained recovery requires the euro area also to accelerate growth, which may well result in a temporary shift into external deficit, which would help global adjustment. First and foremost, this means deep structural reforms and decisive bank resolution. It also means avoiding too rapid an end to fiscal stimulus, especially in surplus countries.
Moreover, any deal between the US and China self-evidently has to embrace China’s global role (its IMF share, for example) as well as its domestic policies, exchange rate, and asset holdings. Here too, Europe is key. By leveraging its external voice more effectively, Europe can have its cake and eat it – more voice for fewer votes….
These priorities are not a latter-day locomotive theory. They make huge domestic sense for Europe also. If the euro area is not to experience severe stress among its southern members, then structural reforms (and a decline in Germany’s surplus over the medium term) are key. And there is some urgency in achieving an effective external voice, to help shape a global system that can manage change effectively as Europe’s share in the global economy shifts into decline.
It takes three, in other words, to tango.Disclaimer: This blog is solely intended to spur discussion, while the opinions expressed are those of the author(s) and do not necessarily reflect the views of CIGI, Chatham House or their respective Boards of Directors.