By Alexander Mirtchev
In 2009, G-20 leaders met in Pittsburgh and emerged
with a mandate ‘to be the premier forum for international economic
cooperation,' endowing the G-20 with a leading economic role on the global
stage. It appeared at the time that the leaders of the G-20 had successfully
defeated pessimism. However, the rising tide of global economic turmoil and
problems ranging from sovereign indebtedness to consumption and saving
imbalances have created a ‘perfect storm' that is far from abating.
The question before the G-20 summit in Cannes this
year is whether to just distribute life jackets or endeavor to overcome
political differences and set forth a concrete, viable roadmap that genuinely
addresses the range of outstanding global economic security risks. Such a
roadmap could go a long way towards countering the uncertainty that has gripped
the global economy.
Although it is difficult to measure the economic
effects of uncertainty, Professor Steven Davis at the University of Chicago
Business School has created a ‘policy-related economic uncertainty index’ which
underscores the fact that policy uncertainty exacerbates market volatility and
has a negative impact on economic growth and the prospects for recovery. His
data reveals that there were clear jumps in index values around the Lehman
bankruptcy and TARP legislation, the Eurozone crisis and the U.S. debt-ceiling
dispute. Looking ahead, Professor Davis’ estimates show that an increase in
policy uncertainty foreshadows large and persistent declines in aggregate
outcomes, with peak declines of 2.2 percent in real GDP, 13 percent in private
investment and 2.5 million in aggregate employment.
Given these
projections, as G-20 leaders struggle to address a range of economic issues
that threaten global recovery, they might consider that continued policy
paralysis exacerbates uncertainty and undercuts market confidence. Adding to
the general sense of economic anxiety is the feeling that policy makers
continue to be misdiagnosing the underlying problem.
For example,
with regard to the immediate hurdle of the sovereign debt crisis, leaders
appear to be primarily addressing a symptom – lack of liquidity, rather than
the underlying cause - a lack of solvency. Only last week Germany’s Angela
Merkel stated, ‘The path is closed for using the ECB to ease liquidity problems.'
At the same time, two top Federal Reserve officials argued that the U.S.
Central Bank should again consider resuming purchases of mortgage backed
securities, in other words, QE3.
Admittedly it is difficult to distinguish between
illiquidity and insolvency when dealing with countries; but there is, in fact,
a difference and the responses to each can have crucial repercussions. Pumping
liquidity in the ocean of debt will not improve solvency; instead it carries
the danger of added inflationary pressures which further feeds economic
turbulence. While debt restructuring may be unpalatable to creditors, it is, in
all likelihood, a reality. Facing up to this reality with a transparent and
viable plan can help diminish the uncertainty that is paralyzing private sector
activity and fueling volatile market sentiment.
Furthermore, uncertainty often breeds fear and fear
begets the temptations of protectionism. In this context, G-20 leaders could
consider openly embracing the fact that tackling the economic issues that are
plaguing the global economy does not mean reducing economic openness and
integration in the world economy.
Richard Fisher of the Federal Reserve Bank of
Dallas underscored the belief that uncertainty is a leading driver of stalled
economic recovery when he said: “Right now, nobody knows what the tax regime is
going to be. Nobody knows what the spending patterns are going to be. No one
knows how much regulatory change is going to take place. The greater the
clarity, the more you remove a factor of uncertainty. Even if (businesses)
don't like it, they'll figure out a way to navigate their way through it. Right
now, there are no decisions being made. And it undermines confidence.” While he
was referring to circumstances in the U.S., his sentiment is just as applicable
to much of the global economy.
At the end
of the day, resolving the challenges facing the global economy requires a
political solution. While it is difficult to determine whether such a solution
will completely counter uncertainty, we do know that from whatever perspective
one considers the choices to be made, they will not be easy ones. But
difficulty is not a reason for inaction. Developing and implementing a viable
roadmap that will help policy makers and business leaders navigate the maelstroms
of this storm will go a long way towards reinvigorating sustainable economic
growth and strengthening global economic security.
Dr. Alexander Mirtchev
is President of the Royal United Services Institute for Defence and Security
Studies (RUSI) International, President of Krull Corp., and a Member of the
Board of the Atlantic Council.
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