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WhatthebankerscanteachstimulusaddictedeconomistsFT.com

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October5,20156:36pm

Whatthebankerscanteachstimulusaddicted
economists
LudgerSchuknecht

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Myopiacontrastswithmoreconvincingactiontorepairthefinancial
sector,writesLudgerSchuknecht

AFP

acroeconomicstimulusisahardhabittokick,somanyeconomistskeepaskingformore.

TheypointtothestockmarketturmoilinChina,therecessioninBrazilandtheoilprice
decline.Andtheyhaveinfluentialfriends.ManyexpecttheInternationalMonetaryFundtouse
itsmeetingthisweekendtocallonGermanytoprovidemorefiscalstimulus.Thefundwill
probablytellcountriestogoeasyonfiscalconsolidation,too.TheUSFederalReservehasbeen
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applaudedbyeconomistsfordelayingitsraterise.
Yet,afterdecadesofattemptstofinetunetheeconomiccycleby
runningfiscaldeficitsandcuttinginterestratesattimesofweakdemand,manyeconomiesare
fragile.Intoomanycountriesdebtandpublicspendingarehigh,andinterestratescloseto
zero.Thisleaveslittleroomforeffectivepolicywhenthenextcrisishitsasitsurelywill.
Governmentdeficitsandprivatesectordebtareathighlevelsinemergingmarkets,andmany
westernonestoo.Ageingpopulationsareweighingonpublicfinances.Militaryconflictsand
failedstateshaveledlargenumbersofrefugeestothegatesofEurope.Tradersgambleon
continuedbailouts.Ebolahasremindedusofthedevastatingeconomicdamagethat
pandemicscaninflict.Thosearejustthechallengesweknowabout.And,aswelearntinthe
weeksafterLehmanBrotherscollapsed,lotsofbadnewscanarriveatonce.
Forallthesereasons,itisvitalwebuildresilienceintothesystem.Thereisanotherreasonwhy
thisisimportant.Consumersandbusinessesaremoreconfidentintheireconomicprospects
whentheybelievegovernmentsandcentralbankscanrespondtochallenges.Andconfidenceis
thebasisforlongterminvestment,robustconsumption,employmentandgrowth.Thismay
explainwhyinvestmenthasbeenslowtorecoverdespiteextraordinarilyaccommodative
monetarypolicy.
Yetthislessongoeslargelyunheededpolicymakersareurgedtopilemoredebtontheexisting
mountain.Nevermindthattheeffectongrowthisbecomingsmallerandsmaller.Nevermind
thatzombiebanksandenterpriseswhichwouldgounderifinterestrateswerehigher
barelyinvest,whichun
dermineslongtermgrowthprospects.
Theworkofrepairingpublicsectorbalancesheetshasgroundtoahaltalmosteverywhere.
Whatgovernmentssave,becausedebtservicecostsarelow,theyoftenspend.Publicdebtin
manycountriesisnowwellabove100percentofgrossdomesticproduct.Thiswouldhave
beenunthinkableadecadeago.
Themyopiainmacroeconomicpolicycontrastswithmuchmoreconvincingglobalactionto
repairthebankingsector.Here,rebuildingresiliencehasbeenthemotiveforregulatory
reformsandcapitalaccumulationinrecentyears.Banksseemmuchmorerobustthanthey
werebeforeLehman.
Suchanapproachisalsoneededforpublicfinances.NationssuchasGermanyhaveastrategy
gearedto
wardsresilience,butfacecriticismforit.Manyeconomistsseebalancedbudgetsasan
unnecessaryobstacletoexpansionaryfiscalpolicy.TheyglossoverthefactthatGermandebtis
onlygraduallyfallingtoprecrisislevels.Theyrarelyacknowledgethatsoundfiscalpositions
haveallowedthecountrytoraiseinvestmentanddealwiththecostsofhundredsofthousands
ofrefugeesthisyear,sofarwithouttoomuchexcitementaboutthecosts.Resilience,not
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profligacy,isthefoundationofconfidence.
GermanyssoundpublicfinancesarealsothebasisforEuropeanstability.Withoutguarantees
andsupportfromBerlin,the500bnEuropeanStabilityMechanism,meanttoprotectagainst
futurecrises,wouldnotbecredible.WereitnotforthestrengthofGermanyseconomyand
balancesheet,theEuropeanCentralBankwouldhavemuchlessscopetouseunconventional
policiesandremaincredible.NottomentionthefactthatBerlinisoneofthelargest
contributorstotheEUs150bnannualbudget,asignificantpartofwhichistransferredtothe
poorercountriesofEuropeandbeyond.
Intheincreasinglyglobalisedeconomy,nationslackingresilienceincreasinglyrelyonsupport
fromotherswhofearthat,unlesstheycommittheirownresourcestofightingfarawaycrises,
theywillfindthemselvesengulfedbythegatheringstorm.Thiscreatesanewformofmoral
hazard:sincecountriesthatbehaverecklesslywillbebailedout,theyhavelittleincentiveto
reform.
TheGroupof20leadingnationsandtheIMFshouldaimtomaketheinternationalfinancial
systemstrongbyimprovingtheresilienceoftheirmembers.Unlesstheydo,talkofglobal
safetynetsisfutile,andfocusinginsteadonstimulusisoutrightfrivolous.
ThewriterischiefeconomistoftheGermanfinanceministry
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