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An end to fiscal stimulus?

06-27-2010 13:08 BJT

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The G20 summit comes at a crucial time for the 27-nation European Union. The group is facing increased uncertainty over its economic outlook as it switches from stimulus to spending cuts to deal with a sovereign debt crisis among some members. World leaders too are split on stimulus spending and deficit reduction.

It was hailed as the toughest belt-tightening exercise in the UK since the war.

Tuesday's emergency budget saw a slash-and-burn attack on benefits and the public sector balanced with tax hikes and pay freezes.

Government spending is set to fall by 25 percent over four years, the VAT sales tax will go up to 20 percent from 17-and-a-half.

UK chancellor of the exchequer George Osborne said, "This budget is needed to deal with our country's debts. This budget is needed to give confidence to our economy. This is the unavoidable budget. "

Britain isn't the only one trying to avoid the situation Greece faced last month when it was staring at the prospect of bankruptcy.

Germany, France and Japan have also announced deficit-cutting plans.

But the US is concerned these policies will hurt the world economic recovery.

Treasury Secretary Timothy Geithner and top White House economic adviser Lawrence Summers wrote an article in the Wall Street Journal.

They pressed the G20 not to curb deficits so quickly to risk pushing the global economy back into recession.

Howard Davies, director of London School of Economics & Science, said, "... because the role of dollar in the global system is so central, I think the US can possibly afford to be a little bit relaxed about the speed which we do something about the deficit because frankly people don't have a lot of choice but to invest in US assets. So the Americans, I think, will probably somewhat later to do with that deficit but I believe they will do it in the end."

As some countries fear a second global downturn, the International Monetary Fund sees global economic growth of 4-and-a-quarter percent this year.

And it stresses that most advanced economies do not need to tighten policies before 2011, but should neither add further stimulus.

Meanwhile, fast-growing advanced and emerging economies can start tightening policies now.

Chen Fengying, research fellow of China Inst. of Contemp. Int'l Relations,said, "The withdrawal of the stimulus polices should depend on the situation of different countries, as the world economic recovery is not balanced. The Europeans are concerned with the debt crisis, while the US looks forward to sustained growth. And the Asian countries should deal with the property bubbles. But the countries still need to coordinate together to take their own withdrawal policies."

But some doubt the G20's ability to coordinate.

Howard Davies said, "There was a period in the winter in 09 when the Chinese economy stalled and everybody knew they had to do something to prevent the world economy from going down hill. So coordination would work. Now China is back to growing 10 percent. Greece, Spain recently, the problem is very different now."

The test of this summit will be whether leaders can make credible commitments to the reforms.

This is why coordination is so important: one moving alone might suffer: if all move together, collective and individual outcomes are likely to be better.

Editor:Zhang Ning |Source:

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