Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.
The global financial crisis has resulted in the IMF saying that there is a need to rethink macro policy. Samuel Brittan from the Financial Times has reflected on how central banks were lured into thinking that stability had been achieved with low inflation and how little we know when it comes to setting new targets.
But while the crisis may have challenged some of our pre-crisis economic orthodoxy, maybe part of the problem we have in responding to the crisis is that we are just slow learners. Or maybe the problem is that we continue to kick the politically difficult, but essential, reforms down the road. This is particularly the case when it comes to structural reforms.
The post-crisis response has focused on what is presented as a 'growth versus austerity' debate; in short, whether the pace of fiscal consolidation to reduce public debt should have no regard to the state of economic activity. It is a false debate. No sane person would chose austerity over growth. And there should also be no question of the importance of having sustainable public debt levels. But why so much attention on fiscal austerity and so little on what it takes to restore growth? This is where we are slow learners.
The FT's headline on 28 May announced that the 'EU eases hard line on austerity':
Brussels will on Wednesday give its clearest signal yet that it is moving away from a crisis response based on austerity, allowing three of the EU's five largest economies to overshoot budget deficit limits and pushing instead for broader reform.
The 'change' in Brussels is welcome, but why hasn't the EU pushed broader reforms before?
The problem facing many European countries is not only high debt but the absence of productivity growth, declining competitiveness, labour market rigidities, limited competition in some markets for goods and services, excessive regulation, deficiencies in education and training, and underinvestment in infrastructure. Reforms are needed in all these areas in order to restore sustainable growth. Fiscal and monetary policy can only buy time.
But this is not new. The OECD has been preaching this message for years. In its 2012 flagship publication, Going for Growth, the OECD said 'the combination of macroeconomic action, making the best use of policy space, and country specific structural reforms can make the difference'. As we have pointed out before, the IMF has been consistent with the advice it has given the G20 since the crisis, namely: accommodative monetary policy, fiscal adjustment that includes concrete and credible plans to reduce debt over the medium term but does not undercut growth in the short term, clean-up of the banking sector, and pursuit of structural reforms to boost productivity and lift growth.
The world has been captivated by 'Abenomics', Prime Minister Abe's plan to force the Japanese economy out of deflation and serial recession. In particular, the focus has been on Japan's aggressive monetary and fiscal policies. But the 'third arrow' in Abe's plan is structural reform, and he has acknowledged that the 'graver task' confronting his government is to enhance Japan's productivity, retool its economic structure and provide women with greater economic opportunities.
Abenomics got off to a flying start with a sharp rise in the Japanese stock market. But in recent weeks there has been a sharp correction in the Nikkei, falling 11% since 22 May. Some of this may be profit taking, but there are growing concerns that Abe will delay announcing the politically controversial structural reform program until after the upper house elections in July. But as Abe has clearly articulated, sustained growth will not be achieved without the structural reforms.
While Brussels has said it will be pushing for stronger structural reforms in Europe, what are the prospects for success? Tony Barber in the FT says Europe will struggle to swallow economic medicine. The European Commission gave France two more years to meet its budget deficit target, but President Hollande's response to the Commission's call for bolder reforms was that the commission 'cannot dictate to us what we have to do...On structural reforms, especially pension reform, it's for us and only us to say what is the right way to attain that objective'.
And what has France done? It has lowered its pension age. There are some slow learners out there.
Photo by Flickr user Photomatt28.