Commentary
Uri Dadush
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Source: Getty
In The Media
Is More Fiscal Stimulus Needed?
Countries that can afford to continue to spend, including the United States, should not abandon fiscal stimulus until the private sector recovery is clearer.
By Uri Dadush
Published on Jul 15, 2010
Source: Council on Foreign Relations
- The state of the global recovery. It is happening, but we are not out of the woods yet. The global economy has been growing for at least a year, but unemployment and excess capacity remain high, and private demand growth shows signs of slowing. Though emerging markets are still pulling world demand, Europe's debt crisis poses a big threat.
- The capacity of monetary policy to keep the recovery going. With inflation still subdued, monetary policy can remain expansionary for the foreseeable future. Its effectiveness will be undercut, however, if risk-appetites falter and lenders hoard cash. Furthermore, exclusive reliance on monetary policy may create problems later, especially in the overheating, fast-growing emerging markets.
- Confidence that countries can repay their debt. Markets continue to let large advanced countries borrow at record-low interest rates despite the 20-30 percent of GDP increase in their debt levels. However, Greece is probably bankrupt, and Spain and other troubled economies in Europe are paying a premium of 150-200 basis points over German rates. These countries have no choice but to reduce their deficits quickly.
Countries that can afford to should continue fiscal stimulus until the private sector recovery is clearer. Among the G7, this group clearly includes the United States, Germany, France, and Canada, and may include Britain and Japan, but not Italy. Further fiscal stimulus is essential in Germany, where domestic demand is stagnant and exports are booming, putting even more pressure on the European periphery. Germany has too much at stake in the euro to pursue mercantilist policies. Booming China's massive stimulus must be withdrawn but gradually and with care, given the international uncertainty.
Originally published by the Council on Foreign Relations, July 15, 2010
About the Author
Uri Dadush
Former Senior Associate, International Economics Program
Dadush was a senior associate at the Carnegie Endowment for International Peace. He focuses on trends in the global economy and is currently tracking developments in the eurozone crisis.
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Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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