Opinion

Lawrence Summers

The right agenda for the IMF

Lawrence Summers
Apr 7, 2014 12:57 UTC

The world’s finance ministers and central bank governors will gather in Washington this week for the twice yearly meetings of the International Monetary Fund. Though there will not be the sense of alarm that dominated these meetings after the financial crisis, the unfortunate reality is that the global economy’s medium-term prospects have not been so cloudy for a long time.

The IMF in its current World Economic Outlook essentially endorses the secular stagnation hypothesis — noting that the real interest rate necessary to bring about enough demand for full employment has declined significantly and is likely to remain depressed for a substantial period. This is evident because inflation is well below target throughout the industrial world and is likely to decline further this year.

Without robust growth in industrial world markets, growth in emerging markets is likely to subside — even without considering the political challenges facing countries as diverse as Brazil, China, South Africa, Russia and Turkey.

Facing this inadequate demand, the world’s key strategy is easy money. Base interest rates remain essentially at floor levels across the industrial world and central banks signal that they are unlikely to increase anytime soon. Though the United States is tapering quantitative easing, Japan continues to ease on a large scale and Europe seems to be moving closer to starting it.

This all is better than the tight money policy of the 1930s that made the Great Depression great. But it is highly problematic as a dominant growth strategy.

Europe’s hair-trigger economy

Lawrence Summers
Mar 18, 2013 10:56 UTC

Europe’s economic situation is viewed with far less concern than was the case six, 12 or 18 months ago. Policymakers in Europe far prefer engaging the United States on a possible trade and investment agreement to more discussion on financial stability and growth. However, misplaced confidence can be dangerous if it reduces pressure for necessary policy adjustments.

There is a striking difference between financial crises in memory and as they actually play out. In memory, they are a concatenation of disasters. As they play out, the norm is moments of panic separated by lengthy stretches of apparent calm. It was eight months from the Korean crisis to the Russian default in 1998; six months from Bear Stearns’s demise to Lehman Brothers’ fall in 2008.

Is Europe out of the woods? Certainly a number of key credit spreads, particularly in Spain and Italy, have narrowed substantially. But the interpretation of improved market conditions is far from clear. Restrictions limit pessimistic investors’ ability to short European debt. Regulations enable local banks to treat government debt as risk-free, and they can fund it at the European Central Bank (ECB) on better-than-market terms. The suspicion exists that, if necessary, the ECB would come in strongly and bail out bondholders. Remissions sometimes are followed by cures and sometimes by relapses.

Job #1 for the IMF: Stay the course and avoid lurches to austerity

Lawrence Summers
Oct 15, 2012 03:57 UTC

If the global economy was in trouble before the annual World Bank and IMF meetings in Tokyo this past weekend, it is hard to believe that it is now smooth sailing. Indeed, apart from the modest stimulus provided to the Japanese economy by all the official visitors to Tokyo, it’s not easy to see what of immediate value was accomplished.

The U.S. still peers over a fiscal cliff, Europe staggers forward preventing crises King Canute-style with fingers in the dyke but no compelling growth strategy, and Japan remains stagnant and content if it can grow at all. Meanwhile, each BRIC is an unhappy story in its own way, with financial imbalances impeding growth in the short run and deep problems of corruption and demography casting doubt on long-run prospects.

In much of the industrial world, what started as a financial problem is becoming a deep structural problem. If growth in the United States and Europe had been maintained at its average rate from 1990 to 2007, GDP would be between 10 and 15 percent higher today and more than 15 percent higher by 2015 on realistic projections. Of course this calculation may be misleading because global GDP in 2007 was inflated by the same factors that created financial bubbles.  Yet even if GDP was artificially inflated by 5 percentage points in 2007, output is still about $1 trillion short of what could have been expected in the U.S. and EU.  This works out to more than $12,000 for the average family.

Austerity has brought Europe to the brink again

Lawrence Summers
Apr 30, 2012 02:13 UTC

Once again European efforts to contain crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank’s commitment to provide nearly a trillion dollars in cheap three-year funding to banks would, if not resolve the crisis, contain it for a significant interval. Unfortunately, this has proved little more than a palliative. Weak banks, especially in Spain, have bought more of the debt of their weak sovereigns, while foreigners have sold down their holdings. Markets, seeing banks holding the dubious debt of the sovereigns that stand behind them, grow ever nervous. Again, Europe and the global economy approach the brink.

The architects of current policy and their allies argue that there is insufficient determination to carry on with the existing strategy. Others argue that failure suggests the need for a change in course. The latter view seems to be taking hold among the European electorate.

This is appropriate. Much of what is being urged on and in Europe is likely to be not just ineffective but counterproductive to maintaining the monetary union, restoring normal financial conditions and government access to markets, and re-establishing economic growth.

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