Austerity vs growth is fool’s dilemma: OECD


Organisation for Economic Co-operation and Development (OECD) chief Angel Gurria says he sees little risk of renewed recession in Europe or more generally despite drastic spending cuts by some countries under intense pressure to reduce large debts.

In an interview with Reuters ahead of a G20 summit this weekend, Gurria said governments had found it easier to work together when they were combating recession than they would from now on, with the focus shifting to debt reduction and longer-term fixes for the global economy. “Everybody’s gotten deep into debt to face the recession and get out of recession,” said Gurria.
“Everybody did it willingly, deliberately, holding hands and saying ‘let’s do it’. But now everybody’s saying it’s time to think of a better balance. Striking that balance, and the sequencing, is going to be complicated.” Gurria was set to attend a G20 summit which was preceded by signs of tension between Washington and Berlin, as the former stresses the need to avoid killing the recovery and the latter the need for cutbacks to lower debt.

The G20 summit, grouping large industrialized economies and rising powers such as China, India and Brazil, takes place in Toronto on Saturday and Sunday, after a Friday and Saturday gathering of the narrower G8 group of wealthy nations. Gurria said the urgency of debt reduction varied from country to country and it was wrong to characterize the problem now facing many of the world’s advanced economies as a mutually exclusive choice between austerity and economic recovery.
“It’s not a dilemma. It’s a fool’s dilemma. You have to do both,” said Gurria.

Countries such as Britain has just joined others in Europe to announce drastic austerity measures because they had to get debt under control and reassure financial markets, he said, while others were in less of a hurry. Others would follow later, but it did not look like there was any serious risk of either Europe or the world more broadly sliding back into recession as a result of the shift toward debt reduction, as long as it was carefully calibrated.
“I don’t believe there is going to be a double dip,” he said, noting that recently both Britain and Germany had given “very powerful signals” in announcing major deficit reduction plans. The aggregate debt of advanced G20 countries is expected to surge to 107.7 percent of GDP this year from 80.2 percent at the outset of the financial crisis in 2007 that triggered the first global recession since World War Two last year.

Now that the advanced economies were crawling out of last year’s recession, it was harder if no less necessary for G20 powers to work together again to establish better balance between trading blocs and reform the financial sector to limit the risk of repeat crises in the longer term, said Gurria. “If there’s a fire we all know what to do. We get a hose, we get a pail of water, spit on it, throw Coca Cola on it or whatever to put it out,” said Gurria.
“Right now the fire’s over. We saved the house, mostly, but you’ve got to paint it, plaster it, whatever.” Gurria said the G20 was moving “inevitably and predictably” into a post-recession phase where policy choices were less easy to agree. “The divide today between the United States and Europe is a very good example,” he said of the tensions over austerity. Progress had been made toward correcting some imbalances in the global economy, Gurria said, notably in exchange rates.

The euro, whose exchange rate value has recently declined in tandem with a debt market crisis, now better reflected economic reality, he said. “There is now a balance, an economically more reasonable balance, in the exchange rate, and in particular vis a vis the Chinese,” he said.

Beijing’s recent decision to break the yuan’s peg to the dollar would also help and should allow for gradual appreciation of the Chinese currency. “It’s welcome in the sense that it takes away an element of uncertainty, a rigidity in the system,” he said.

Meanwhile Business Day today reports former Development Bank of Southern Africa CEO Ian Goldin warning yesterday that rich western countries had fired all the fiscal bullets at their disposal and there was nothing left in the kitty to salvage their economies if they sank into recession again as feared. “There is absolutely nothing left to fire,” Mr Goldin, director of Oxford University’s James Martin 21st Century School, told a gathering at the Fortune-Time-CNN Global Forum in Cape Town.

There was a high risk of a double-dip recession, made all the more dangerous as most governments did not have any more ammunition to deal with it, he said. “Markets are very fickle and if they turn and spreads widen much further we could get into a very nasty downward spiral,” Mr Goldin said.

His concerns were tempered by confidence that emerging markets such as China and Brazil would provide the global economy with an engine of growth.

Themes Investment Management chairman Kenneth Courtis, the former MD of Goldman Sachs, emphasised the danger posed to global growth by the huge overhang of public and private debt in developed economies. This would lead to a double-dip recession, he said. “I think this crisis is far from over. This is a period of fool’s gold where people think the worst is behind us. This is going to be a very rocky ride, so we are going to have to keep our seatbelts on.” Tom Albanese, CEO of mining giant Rio Tinto, echoed the point. “I remain concerned by the sovereign debt situation in southern Europe and think that does represent a possible risk to global economic growth. I hope to see policy makers and banks sort (out) the problem. But we should recognise that, looking ahead, we should probably see more rather than less volatility,” Albanese said according to Business Day.

Courtis predicted that governments were likely to rely on a combination of belt tightening, inflation, and growth in emerging markets, and political leaders would have difficulty holding on to office.
“If austerity wins out, it will push the economies down and with the debt levels being what they are, it will not be a soft landing, it will be a brutal landing which will smother economic growth,” he said. “My sense is that stock markets will anticipate this and not only test the low of March last year but make new lows in a bear market.”

Trade and Industry Minister Rob Davies also said there was a growing risk of double-dip recession, but the good news for SA was that the centre of world growth was in developing countries . But SA, particularly manufacturing, would be affected by a recession in the developed world.