Fabian Demicoli

Out Of The Crises and Return to Stability and Growth

Vincent Farrugia, GRTU's Director General and EESC Maltese Employers' representative, was one of the speakers on behalf of EESC during this special EESC ECO and SOC section meetings that discussed: "Overcoming the crises – towards a policy programme for sustainable recovery". The main keynote speaker was Klause Regling. Throughout the 30 year period up to the bankruptcy of Lehman, most Governments and Central Banks acknowledged only one official objective for macroeconomic policy: to control inflation.

 

 

 

Only one reasonable criterion for judging the success of macroeconomic policy seams to remain: price stability. In the post/recession period that has already started so very badly, these polarized dichotomies between the monetary and the real economy, between responsibilities for inflation and unemployment, between the aims of micro economies and macro economies no longer make sense. All economic objectives will need to be juggled in a more complex manner.

Central banks need to concentrate on nominal GDP, the total spending in the economy, taking both inflation and real economic growth into account. They should continue to strive to achieve low inflation but also highlight adequate levels of economical growth and employment and also ensure reasonable credit growth and will have to collaborate with authorities in other major economies to ensure exchange rates and trade imbalances do not get too far out of line.

Governments must have the power to enable them to accept much wider responsibilities for ensuring growth. Growth must be internationally balanced with much more emphasis on exports in the USA, Britain and the periphery of Europe and on higher consumption in China, Germany and Japan. Governments will have to accept this new-found responsibility for comprehensive economic management while setting public spending and borrowing on a rapidly declining path. This is a difficult task, but the age of easy politics blind dependence on the markets is over.

After the shock of the recession action has taken a more interventionist approach never dreamt before, and economic growth began to rise. Action was however reduced thinking they have done enough. The trouble soon came back. By the beginning of 2010 as the USA reported its strongest economic growth since 2003, as financial markets recovered and as banks allegedly on the point of failure suddenly announced record profits even die-hard skeptics believed the worst was over. But the serious problems remain.

With Governments everywhere focused on stimulating growth and reducing unemployment with the specter of stagflation resurfacing. The answer is economic governance not just at European level but internationally. The emergence of G20 is already making a difference. Should Government act as they revive their true role and responsibilities and as economic recovery becomes established, unemployment falls and output gaps narrow around the world, by later, half of this decade, inflation will again become a concern. Monetary expansion on its own is not a cause of inflation, the same way that gravity on its own cannot cause planes falling out of the sky.

Today we have a world economy overbalanced with excess capacity in almost every industry and with millions of unemployed workers who are eager to work for competitive wages. Monetary expansion should not therefore cause concern on inflation. Low interest rates and the growth of credit should instead create real economic growth until excess capacity and unemployment are reduced to their long-run average levels – a process that should take 3 to 5 years in the most optimistic global growth forecasts and considerably longer than a decade according to the more common assumption of the normal of tenant of subdued growth that reigned when targeted inflation was the main goal of macroeconomic policies.

Stagflation is possible not in a properly functioning market economy but where competition is thwarted and excess supply is blocked by barriers and cartels of various kinds. In the late 1960s and 1970s at least 4 such barriers to competition rose high, phenomena that are not likely to recur in the decade ahead.

Chasing GDP growth results in Lower Living Standards. The financial crisis profoundly altered politics around the world. It convinced voters of the need for competent administration and regulation but also spread terror about the costs of governments and their debts and created tremendous confusion about the capability of financiers, regulators and politicians, past and present. In just a few years we have seen a genuine revolution in the mentalities. For a first the heads of government of the 20 largest economies are deciding on measures that must be taken to combat a world crisis. Moreover, the crisis had proved that the world could not rely blindly on market solutions.

The European Union must act and appear to act as a trade union with strong economic governance in line with the new economic strategies that should not only get us out of the crisis but move us forward to sustainable growth as defined in our 2020 strategy and beyond. The future that beckons depends on how determinedly we accept our responsibilities today.

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