2 steps out of the global recession: Step 2

Yesterday I mentioned the use of aiming Quantitative Easing (QE) direct to the people through funding tax cuts or even personal cheques. This in itself will not aid a global recovery. Another necessary step is for the entire world to do this at the same time – globally co-ordinated action.

Effectively the recession is a global crisis and to solve this it requires a global solution. The reasoning is that at the moment most Governments are cutting back on public spending, this is taking demand out of the economy as private investors are not filling the void. Beggar thy neighbour tactics are appearing with more protectionism and greater focus on “national” interests, understandable in the current climate, but economically futile.

Instead the international community must work together and economic policy changes co-ordinated. As Franklin Roosevelt said at the opening of the Bretton Woods summit in 1944

“The economic health of every country is a proper matter of concern to all its neighbours, near and far.”

But what do I mean? Obviously co-ordinated attempts have been attempted before in trying to save financial markets and individual country credit ratings with loan guarantees. These have generally not worked as they are designed purely to appease the lending markets. I personally see three things the international community can do together.

  • If there is to be QE, all countries should do it at the same time, in the same way and the same proportion so that relative to each country, there is impact on currency values, or inflation. The markets will be less likely to threaten one country than another.
  • Common sharing of risk is needed to tackle the markets so a “Euro bond” or even a “World bond” should be introduced. This will mean one interest rate on debt, so the UK will have the same interest rate as Iceland or Germany and Greece on its borrowing. Without the sharing of risk, I struggle to see how countries can stand up to market forces (countries get picked off as we have seen in the Eurozone).
  • Accelerated regulation and approval of new (and green) technology. We all know that the world is changing environmentally, that fossil fuels are harder to find, there is no lack of rhetoric but the lack of action is depressing. There should be international agreement on areas such as air emissions, carbon capture technology, renewable energy targets enforced, environmental standards brought in for construction, focus on sustainable farming; support in all these areas for developing countries. All this backed up with regulation and firm investment commitment. If a world standard is set, enforced and developing countries supported, all countries will be better off in the short run (increased investment, new industries started) and in the long run (environmentally and lower cost of intervention). There will be a need to for more investment, and certainty provided for investors, something that is sorely lacking in the current green technology space globally.

The EU, UN, IMF, World Bank and, more importantly, individual Governments must act decisively and together to get the world economy back to full health. It means taking unorthodox measures, but extraordinary times require an extraordinary response. John Maynard Keynes understood this in the 1930s and 40s and we need today’s policy makers to have the same vision.

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A very British problem

Once again Tory Eurosceptics are demanding for a referendum on the EU, powers to be repatriated and even more protection for the City.

Once again they are wrong.

The coalition agreement has stated that a referendum is only applicable when more powers are to be transferred from the UK to Europe, there is no suggestion that this will be the case. Secondly the main issue is for the Euro zone to get its house in order as it is critical to the world economy.

Instead of sniping from the sidelines the UK should be working as hard as possible to steer the Euro into a long term sustainable position, rather than taking sticking plaster solutions. I do agree that inevitably we will need to decide whether the UK is in or out, but now is not the time, there are bigger issues at stake than our own sense of world importance and self rule. We either want to be in “the club”, have peripheral membership but refrain from constant attempts to have things on our term all the time or get out completely.

Lastly, although the City is important to the UK economy, we do seem to bend over backwards for the financial sector and are prone to their lobbying tactics, when more important is the rebalancing of the economy. Come on actions not just words on a new economy.