FE Editorial : G-20 whimper

Written by The Financial Express | Updated: Jun 30 2010, 02:46am hrs
It is now increasingly clear that the international coordination of fiscal and monetary policies, which began after the global economic crisis broke out, has run out of steam. We had argued in these columns last week that the G-20 heads of government meet in Toronto would be dominated by a discussion on whether to continue fiscal stimulus, particularly in the context of the debt crisis that has unravelled in Europe. There were always going to be two sides of the debate and thats exactly how it turned out over the weekendthe US and leading emerging economies, including India, batted for continued stimulus given the fragile recovery while the major European economies batted for retrenchment in public spending to control their runaway deficits and debt. In the end, the G-20 collectively agreed to halve deficits over a three-year period and to bring debt-to-GDP ratios under control by 2016. What really matters now, though, is what individual countries decide to do, given the different points on which they stand at this stage of recovery/crisis.

The US is likely to continue with soft monetary and fiscal policies for a lot longerinflation isnt a real worry and output has been hopelessly slow in showing recovery. As long as the dollar is the worlds reserve currency, the US can sustain this strategy for a while longer. India, too, must continue with relatively easy monetary policy for a while longer and only gradually move to an exit from stimulus. On the fiscal side, the government has acted sensibly by reforming costly fertiliser and oil subsidy as a means to rein in the deficit rather than go for serious cuts elsewhere. Chinas dilemma is more complex because of pressure on asset prices, but they have acted in their own way by beginning a revaluation of the yuan. Europe simply has no choice but to cut deficits and cut debt straight away. It may indeed cost in terms of growth in the short run but it will yield positive results in the medium term, especially if Europe undertakes structural reforms that will unleash growthEurope needs to finally address its supply-side bottlenecks. Expect a completely uncoordinated exit from stimulus during the rest of the year.