If the countries of the world work together, the challenges posed by the credit crisis can be overcome.
During November 2008, as I worked on the autumn Pre-Budget Report, I saw a striking statistic. In the course of the previous month, US share prices had seen their biggest drop since 1932, and that year alone, more than $30,000bn had been wiped off the value of global shares – twice the size of the US economy. This left little doubt, in my mind, that the world was facing financial and economic challenges not seen for generations.
In the face of volatile conditions, febrile markets and disrupted economies, a number of questions emerged. What were the roots of this crisis? How should governments everywhere deal with the fallout? What will financial markets look like once we are through this? And what will be the future shape of the international institutional architecture?
Working together
To begin answering these questions, the Group of 20 major economies met in Washington late last year. It was the first time that the G20 meeting had been attended by world leaders as well as finance ministers. It was a momentous occasion, and marked a recognition that working alone, as individual countries, there can be no solution. But together, everyone agreed, we could get through this global credit crunch.
This year sees the UK assume the presidency of the G20, and there could not be a more challenging time to pursue the global economic reform agenda. Looking ahead to our next leaders’ meeting in the UK in April, it is clear to me that the UK needs to lead the process of managing globalisation as a force for good. And as part of this, I see five key priorities for international economic policy over the coming year.
First, there ought to be coherent and concerted policy action across the world in the form of both monetary and fiscal policy.
The major central banks have already eased monetary policy, both individually and collectively, attenuating the impact of the downturn. And looking forward, there may well be room for further monetary easing, if commodity prices remain low. But while the risk of higher inflation has receded, deflation is becoming the latest worry. Clearly, different countries have different room for manoeuvre on monetary policy, but the interests of both price stability and support for the economy must be considered.
Fiscal policy also has an essential role to play alongside monetary policy in sustaining demand. A fiscal stimulus, designed to be timely, temporary, targeted and sizeable, will complement lower interest rates – all the more if done as part of a concerted international response, tailored to individual country circumstances.
And emerging economies with large accumulated surpluses could also act to rebalance growth as appropriate. This could include supporting other countries in their regions directly or through the international financial institutions.
So far we have seen a clear international consensus around the need to take fiscal action. Since October alone, Spain, France, Australia, Germany, China and Japan have all acted to support their economies. The US started even before then, earlier last year, and the intention of president-elect Barack Obama is to go even further.
Pressing on
Second, countries must build on their work to shore up the banking system. In early October, the UK took the lead in recapitalising the major banks and offering a guarantee scheme for newly issued debt. Within days these schemes were copied around the world.
The objectives were twofold. Most of all, it was paramount to prevent the collapse of the banking system, on which the whole economy depends. And this was an essential precondition to seeing a resumption of lending to the wider economy. And this, in turn, would kick-start an economic recovery. By the end of November 2008, the major UK banks had raised more than £50bn ($76.5bn) of new capital, from various sources, while some £100bn of guaranteed debt will have been issued.
Third, we need to work together to address the failures in the global financial and supervisory architecture, which have been so palpably exposed by this crisis. In doing this, we will be guided by some core principles:
- Transparency, so that risks can be managed better, and troubled assets cannot be hidden;
- Integrity and responsible risk management, to discourage excessive risk taking, inappropriate lending and misaligned reward incentives;
- Sound banking, so that all financial firms are run responsibly, and operate within a framework that manages the risks they create for the wider economy; and
- Better cross-border co-ordination of financial regulation. This will include a global early warning system, accepted standards of regulation, colleges of supervisors and cross-border stability groups. As part of this, we will need to strengthen the legitimacy and governance of the Financial Stability Forum and International Monetary Fund, to make them better able to foster international financial co-operation.
Fourth, we must boost world trade and reject protectionism – being vigilant to immediate problems over trade finance – and work for more stable and secure global commodities markets.
Fifth, for action to be effective, countries must act together. Goods are increasingly traded across borders, while services can be purchased from anywhere in the world. Financial globalisation is becoming wider and deeper. So with markets not confined to national territories, neither should their regulation or supervision. And with economies more and more internationally integrated, any action to counter falling demand and fragile confidence will have to be co-ordinated across countries.
The long view
Working on these five areas, within the wider group of nations that comprise the G20, I am confident that we will see the world economy get through this downturn. And in doing this, we must also reaffirm our commitment to meeting other global challenges, despite the financial turmoil. Because the challenges of today must not make us forget about the challenges of tomorrow – such as maintaining aid flows to meet the Millennium Development Goals, combating climate change or setting out a long-term vision to manage globalisation as a force for good in the global age.
Looking back through history, many major crises have been followed by major policy mistakes – witness the protectionist retrenchment of the 1930s and the failure to maintain monetary stability during the oil crisis. We must not repeat those mistakes. Today, countries everywhere recognise that doing nothing is not an option. Now, more than ever, governments all over the world need to act decisively.
Alistair Darling is the UK chancellor of the exchequer.
