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October Policy Letter Calls For Coordinated Global Policymaking, to Reinvigorate Economic Growth
Washington D.C., October 4, 2012 — The October 2012 Policy Letter from the IIF argues that the “global economy is at a crossroads” and calls for global policy coordination to fend off “substantial” downside risks. Commitment to a “substantive policy coordination process” has recently weakened, as individual countries have turned inward and focused on domestic priorities and objectives. The IIF calls for a coherent group within the G20, of those critical countries where major action is needed, to take the lead in forming a broad consensus on adopting policy adjustments that would facilitate the global economic recovery, which currently is stalling.
The IIF’s Managing Director, Mr. Charles Dallara, said: “The international financial community has a collective interest in reducing the uncertainty that currently surrounds the global economic outlook. If we want to lay the basis for a durable global economic expansion, then we need to see more concerted action by the world’s policymakers.”
The Policy Letter argues that enhanced policy coordination would:
- Build on recent promising moves to consolidate progress on the European sovereign debt issue
- Improve the monetary transmission mechanism, enhancing the prospects of success resulting from recent monetary actions
- Avoid protectionist policies and capital controls
- Assist in developing a globally harmonized regulatory framework
- Help stabilize capital flows
- Contain undue pressures on currency markets
The Policy Letter points out that the recovery in mature economies since 2009 has been “anemic and fragile”, with unemployment rates in the U.S and the Euro Area, for example, remaining relatively high, at 8.1% and 11.3% respectively. In Spain and Greece, unemployment rates have risen to about 25%, with a worrying negative impact on human capital.
In the view of the IIF, the overriding challenge now is “to address the root causes of this unsatisfactory, sluggish recovery, with stepped-up policy actions at national levels and enhanced coordination through the IMFC, the G20, and the FSB.” The initial impetus of earlier policy actions – coordinated through the G20 in 2008-2009 – did much, but this has dissipated. The persistently weak demand outlook, the surrounding fiscal policy uncertainties, and the unfortunate inconsistencies between, on the one hand, tighter new regulatory requirements, and on the other, by monetary easing, done in an effort to spur lending, has sent mixed signals.
The Policy Letter considers the several policy decisions taken in the Euro Area since June this year, and welcomes the consequent injection of life into financial markets. It notes the continued efforts of Euro Area periphery countries, such as Greece and Spain, to overcome their sovereign debt challenges, and the Euro Area’s support for Spain through the banking measures taken. It regards the new ECB bond-purchasing program, the Outright Monetary Transactions, as helpful, and supports the proposal to establish a single bank-supervisory mechanism. However, it also argues that Euro Area leaders “need to move more decisively to implement the announced measures in a timely manner to avoid a reversal of the recent broadly positive market sentiment.” Mr. Dallara also underscored the importance of rebuilding economies and avoiding short-term fiscal austerity.
On the regulatory front, the Letter stipulates that greater coordination is needed to ensure that there is harmonized implementation of new rules, thus avoiding the risk of regulatory fragmentation. The IIF urges the BCBS to advance, under the overall guidance of the FSB, its work on the revision that the LCR requires to make it both effective and avoid unduly restricting banks’ ability to channel credit to the economy. The IIF also emphasizes the importance of avoiding procyclicality in regulatory reform. The Institute therefore “shares the concerns expressed in recent weeks by a number of central banks and other policymakers on the need to ensure that both the design and the timing of new regulations” do not hinder global economic recovery.
“The financial integration that we have seen slowly developing in the Euro Area over the last decade is under pressure,” said Mr. Dallara, pointing out the growing financial fragmentation along national divisions. For example, the share of cross-border money market loans has fallen in the past ten years from a previous 60%, to 40% today.
“In conclusion,” said Mr. Dallara, “the world economy appears to be stuck at the crossroads, being pushed in one direction by easier monetary policy, and pulled in another by fiscal austerity. We call on the global policymaking leadership to act cohesively and give a clear direction. The international private financial community stands ready to do its part and cooperate, with its usual responsibility, with the official sector.”