— US Geithner, IMF Lagarde and UK Osborne Call For Coordinated But
Differentiated Global Response To Crisis
— Geithner: Central Bank Gunners Not Out Of Ammo Yet
— Osborne: UK To Hold Firm On Front-Loaded Deficit Reduction Plan
— Lagarde: Safe Triple-As Should Slow Consolidation
LONDON (MNI) – Several Group of Seven finance ministers and
officials have called for coordinated, yet differentiated, action to
tackle the latest crises that are afflicting their economies and
rattling global financial markets.
Ahead of the official meeting of G7 finance ministers and central
bank heads in Marseilles later today, the officials established a common
theme – their response to the latest challenges would not be a repeat of
the synchronised monetary and fiscal policy action which took place in
the wake of the collapse of Lehman Brothers in autumn 2008.
The stalling of recovery in the U.S., euro zone and in the UK is
seen as just as serious a threat to the global economy, particularly
given the overarching sovereign, banking and markets’ crisis in the euro
zone.
As Chancellor of the Exchequer George Osborne said ahead of the
meeting – “global activity has slowed … downside risks have increased
[and the] global rebalancing of demand growth … has stalled”.
But he continued – “The challenges we face are more complex than
those we faced at the beginning of this crisis”.
The comments chime completely with those made by U.S. Treasury
Secretary Tim Geithner in an FT Op-Ed ahead of the meetings.
Geithner also said that although another globally coordinated
policy response, similar to that seen in 2009 was “unrealistic”, Central
Banks can still take policy action to stimulate growth.
“The challenges now are different and cannot realistically be
confronted by a repeat of that coordinated global response of financial
stabilisation and fiscal and monetary stimulus,” Geithner wrote.
The scope for governments to use fiscal policy is now much more
limited for many governments, Osborne said, with an eye on his own
country.
“Then we faced a straightforward battle against the forces of
deflation and instability”.
“Now we must contend with competing pressures, market pressures on
indebted sovereigns, continued banking instability a crisis in the
Eurozone and continuing imbalances in global demand. Just as the
problems are different, so must be the international response”.
“Each country’s response needs to be differentiated”.
IMF Managing Director Christine Lagarde backed him up:
“All this is happening at a time when the scope for policy action
is considerably narrower than when the crisis first erupted.”
Yet Lagarde still stressed that there was a “path to recovery”.
Disappointing media expectations that she might publicly critique
the UK’s draconian fiscal plan, the IMF chief seemed to specifically
validate the rapid pace of UK fiscal consolidation repeatedly insisted
on by Osborne as the ‘rock of stability’ on which the UK recovery
depends.
“The precise path of fiscal consolidation will differ by country.
Those that are facing considerable market pressure, or could face it in
the absence of upfront adjustment, must press ahead with fiscal
consolidation now”.
“But in others, there is scope for a slower pace of consolidation,
combined with policies to support growth” – Lagarde said, without
mentioning a specific country. Given that among the big triple-As only
Germany and Switzerland are presently immune from downgrade speculation,
her comments narrow down the list of suspects dramatically.
As ever with the G7 it seems that governments will do what they
want within a loose framework of international coordination.
The U.S. already seems to have jumped the gun, with President Obama
issuing his plan to boost jobs and growth via a programme of massive
public investment and payroll tax breaks.
The G7 can agree that the fiscal policy tool has virtually reached
its limits in nearly all the advanced economies, they are also in accord
that monetary policy offers the best hope for any further stimulus which
may be needed. There again – the pace will be differentiated and there
will be no replay of the coordinated rate cuts of October 2008.
As Geithner puts it:
“With growth slower and oil prices lower, inflation risks are on
average, though not everywhere, less acute. This means some central
banks will continue to ease policy, while some will keep rates lower
longer and slow the pace of expected tightening. None of the major
central banks are out of ammunition,” he wrote.
The latest comments, news out of the Federal Reserve, the
European Central Bank and the Bank of England confirm that there will
be a variable speed approach to monetary policy responses to the
slowdown.
In a speech in Minneapolis, US Federal Reserve chairman Ben
Bernanke sounded a semitone more doveish than he did at Jackson Hole
last month, but the world’s most powerful central banker remained highly
cryptic.
The Fed may or may not launch ‘Operation Twist’ later this month,
the BOE looks set for QE2 either at its October or November meetings
while comments from the ECB president on Thursday have got the markets
betting on a rate cut there in the next couple of months.
Small wonder then that the ministers and governors have decided not
to issue a communique in the interest of having a more free-ranging
discussion.
–London bureau: +4420 862 7499; email:
dthomas@marketnews.com/wwilkes@marketnews.com
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