Cooperation among economies is fraying, says IMF head
Though the ongoing crisis in Europe dominated Chrystia’s interview with Dominique Strauss-Kahn last Thursday, the IMF head has much to say about the economic outlook for the United States. He believesthe biggest issue facing the U.S. right now is growth — not deficits — although he added that America needs a medium-term plan for fiscal consolidation.
Last week’s passage of the tax compromise should raise America’s growth prospects, but in response to a question about whether the tax cuts on high-earners are stimulative, Strauss -Kahn said, “of course not”.
When asked about the Federal Reserve’s latest round of quantitative easing, Strauss-Kahn endorsed the move, saying it will restore growth both outside and inside the U.S.:
That the American economy is so one quarter of the global economy. And has a role, which is bigger than this 25%. So what’s going to happen in the American economy in 2011 and 2012 has a lot of consequences on the rest of the world. So we have to look the kind of policy which is implemented here not only having in mind the effect of the US economy itself but also the spillover under rest. And that’s why people may have sometime the mixed view. They say, oh, it may help the US economy but on the other hand this can quantitative easing, number two, creates problems to the others because there’s too much liquidity in the world and so on, which is true. But the other hand, what’s the alternative, if the US economy doesn’t grow enough then the consequences under the rest of the world are also very, very bad. So I think that what the authorities are doing goes in the right direction.
QE2 has been fairly unpopular outside the United States. Perhaps more worryingly, Strauss-Kahn thinks the coordination between the major world economies that was fostered at the depths of the financial crisis has now faded away:
Cooperation was incredible and precedent during the climax of the crisis, and that’s certainly the reason why we’re able to avoid a crisis as big as the great depression. The problem is that the momentum for cooperation is now a bit smaller because as people believe rightly or wrongly, I think, whether wrongly that the crisis is over, they have the temptation to go back to their domestic problem and to forget about their consensus and their coordination, you know, in April 2009 in London, even in September 2009 in Pittsburgh, people were scared. That’s good, because when they’re scared they want to work together. Now, the less scared, maybe wrongly again, but the less scared, and so everybody is going back to his own domestic political problem, which I can understand, but that’s not good for the global economy.
Chrystia later asked if Strauss-Kahn was worried about a currency war between China and the U.S. He said that the renminbi is “substantially undervalued” but dismissed any claim that a one-off revaluation would rebalance the global economy overnight, calling the idea a “dream”:
[T]o believe that there is a kind of silver bullet that will solve all the economic problem in the planet just because the Chinese currency will go back on its appropriate value is a bit of a dream… But the question is, how can we convince the Chinese, and I think we are in the process of convincing them, that it’s in their own interest to shift their policy from a totally export-led growth model, which was the model before the crisis, to a model of a growth which is more based on the domestic consumption. And they agree with this. And they shifted in this policy, of course, it’s uncertain and million people economy doesn’t happen overnight. But in the process while they’re doing this they will- it will be consistent with higher value of the renminbi because the shift can be origin of inflation and higher value of the currency will have fighting inflation because to have more consumption at home they will need to have more purchasing power and higher currency will help this.
To reinforce his point, Strauss-Kahn observed that over the past six months, U.S. trade has not improved even though China’s trade surplus has decreased.
Posted by Peter Rudegeair.