This article, by OECD Secretary General Angel Gurría, was published 24 August 2011 in the Wall Street Journal.
Short-term emergency actions will only bring short-term relief.
The world economic outlook has weakened. Growth is losing steam in many of the advanced economies and uncertainty has reached new highs. Public and private debts are holding back investment and consumption. Financial markets have become increasingly turbulent. The rating agencies have overreacted to compensate for their role in the crisis, adding to the downward pressure.
Governments are caught in a vicious circle. They are being forced by markets to take short-term, reactive policy measures on an almost weekly basis. But it’s never enough for the markets. Thus, another round of announcements, another G-20 ministerial, another summit.
There is a lesson here: Emergency, short-term actions that are not perceived to be part of a medium-term strategy will only bring short-term relief. Policy makers can break this perverse cycle, but they need to seize the initiative, rather than simply react to the beat of the markets.
First, tackle the debt issue. Some national fiscal consolidation strategies may take a generation. Consolidation is too important to be seen as an emergency response only. Some countries have already embarked on a consolidation path earlier than others. But most Organization for Economic Cooperation and Development (OECD) economies need to do it sooner or later. And they have to do it within a credible and clearly articulated framework. The recent debt-ceiling debate in the U.S. shows how crucial this is.
The new Franco-German proposal to strengthen euro-area governance and to speak with one voice is welcome. That clearly has been lacking. But even more important is the call from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the commitment to balanced budgets over the medium term should become legally binding in euro-area countries. Sounder national regulations and institutions coupled with stronger EU rules and discipline will reduce the need to use the European Financial Stability Fund (EFSF), which was established last year to issue guaranteed debt to member countries that can’t borrow in the markets.
The size of the EFSF should nonetheless be increased—to as much as €1 trillion from the current €440 billion—to send a clear signal that governments understand the magnitude of the problem and have the firepower and the will to deal with it. In this way, you pursue a two-pronged strategy: creating a huge safety net, while at the same time making all efforts to ensure that you never have to use it.
The European Central Bank should for the time being continue to play a key role in crisis containment, not least as a buyer of last resort of sovereign debt. But we need to consider greater involvement by private-sector creditors to tackle the debt problems of some European nations, so that the resources of taxpayers support the growth prospects of the countries in trouble rather than being used to pay their private creditors.
Given the weaker outlook, central banks should postpone, or even reverse their previous plans for tightening. The U.S. Federal Reserve’s signal that it expects rates to stay exceptionally low for another two years is very forceful.
Given that state coffers are empty in most cases, governments need to go structural. Reforms to product and labor markets should be a primary focus of the long-term strategy to restore sustained growth. This will create jobs and help tackle debt.
Governments should also go social, focusing on policies to help those made most vulnerable by the crisis. The urgency of this is evident in the streets of a growing number of cities in countries at different levels of development. Unemployment benefits or targeted job creating measures should be enhanced, both to reduce hardship and to stimulate demand. Help for overindebted households and those with “underwater” mortgages also needs to be more effective.
Giving people hope and a sense of common purpose is not only crucial for their involvement but also for creating the necessary consensus to support the reforms.
When the financial crisis first hit, policy makers rose to the challenge by stepping up international cooperation to avoid a second Great Depression. But now a Great Regression threatens if we don’t show the same determination—both at home and across borders.
The G-20 has been developing a mechanism for policy commitments and international coordination—the Framework for Strong, Sustainable and Balanced Growth. The time has come to transform it into a real policy tool to put the world economy on an inclusive growth path by tackling, among other issues, current-account imbalances and capital flows on a global scale.
Jonas Salk, who discovered the polio vaccine, used to say that “The most important question we must ask ourselves is, ‘Are we being good ancestors?’” If we take the long view, we may be able to answer “yes.”
Mr. Gurría is secretary-general of the OECD.