The Future of Austerity
Finance ministers and central bankers from around the globe gathered in Washington last week for the semiannual meetings of the International Monetary Fund and World Bank. They were joined by finance officials from the Group of 20 nations.
The conclusions reached at the meeting about the world economy were sobering. After more than three years of sluggish global recession, there is little evidence that austerity is on the rebound. Both rich and poor economies are showing limited growth across the board and policymakers are finding it difficult to explain why. In fact, different viewpoints have been pitched and past policies are being reviewed and analyzed to arrive at some clear elucidation as to which initiative should be introduced next in order to rectify the floundering situation.
The present slowdown in the world economy as well as the U.S. and the International Monetary Fund (IMF)are pitched against the euro zone and U.K. over whether axing budgets and debt is the best direction for recovery or recession. At the Washington meeting, everyone agreed that “much more is needed” to reinforce what they called a “weak” world economy, The U.S. economy is stalled by a household debt and the euro zone is mired in recession, with one crisis followed by another. China posted its weakest year of growth since 1999 and Brazil’s economy is barely crawling along, while facing an increasing threat from inflation.
The G-20 finance ministers and central bankers has been unable to bridge ideological differences over budgets. A discussion over debt targets ended with a promise to revisit how to replace 2010 goals most of which have failed to be met. A clash of approaches is inevitable. One U.S. Treasury official said that the U.S. wanted to avoid hard targets and convinced participants to keep the focus on addressing issues such as unemployment in parts of Europe rather than setting fiscal benchmarks. However, according to European Union Economic and Monetary Affairs Commissioner, Olli Rehn, the region “will have to continue fiscal consolidation because the debt levels have increased significantly.” Other measures were focused on lifting growth and job creation, he said.
The IMF made an about-face from its austerity prescriptions of the 1990s in proposing that economies should be wary of cutting back too fast for fear it will backfire in even weaker economic growth and higher debts. The US is committed to “bringing our deficits down to a sustainable level while building a foundation to promote economic growth,” European officials disagree with U.S.’s approach. European Investment Bank President Werner Hoyer said the “inability to arrive at decisions and reforms is much worse in America than it is in Europe.”
The meeting in Washington ended without a consensus except to agree that the situation is far from healthy. “We cannot unmistakably declare that the worst is behind us,” Brazilian Finance Minister Guido Mantega told the group. “There is a risk of a prolonged crisis, despite all our efforts in the G20 and other international forums.”
