Global policy makers gathered at the International Monetary Fund’s meetings in Washington this week have been greeted with a message few like hearing: If they want faster economic growth, it’s going to hurt.
Central banks in advanced economies are weary from a decade of crisis fighting while fiscal spending can only do so much in an era of aging populations and record debt. That leaves the quest for growth hinging on complicated, slow-acting and unpopular changes like raising retirement ages or further loosening immigration barriers that are already proving to be politically difficult.
So while clubs like the Group of 20 have been paying lip service to the dreaded “structural reforms” for years, officials are now beginning to get down to the details of what that actually means. Trouble is, even as next year’s G-20 global growth agenda will be led by reform enthusiast Germany, the oncoming election roster from the U.S. to the euro-zone makes inaction more likely than deals for change.
“Monetary policy cannot deliver an improvement in potential growth and right now on the fiscal side a lot is going into just supporting short-term demand,” said Janet Henry, global chief economist at HSBC Bank Plc, in an interview in Washington. “Governments know what to do, they just don’t know how to get re-elected when they’ve done it.”
This year, fiscal policy is still providing a boost to global output, with extra-spending plans in place from Canada to China. Monetary policy is loose in all major advanced economies, helping to close the gaps in output that still yawn from the financial crisis.
But that can’t go on forever, especially under the weight of $152 trillion in global non-financial debt, a record level highlighted by the IMF this week.
Current fiscal efforts are “largely fine tuning,” said Charles Collyns, chief economist of the Institute of International Finance in Washington and a former U.S. Treasury official. “If you really want to raise potential growth then you need to do more than just fiscal and monetary policy. You need reforms, and they take time even in the best of circumstances.”
There’s still tension as to where the focus in the global policy mix should be. At a dinner of the International Monetary and Financial Committee in Washington on Thursday evening, U.S. representatives again pushed for Germany to use the room it has — it’s running a budget surplus — to spend and drive demand, according to a person familiar with the discussions.
Yet Germany has consistently resisted this call. In unveiling his priorities for its G-20 presidency that starts in December, Finance Minister Wolfgang Schaeuble on Friday hinted at a technocratic policy list with no mention of fiscal spending being high on the agenda. Instead, he spoke of making tax systems fit for the digital age, investment promotion, and an initiative to promote growth in Africa.
“The first point of emphasis for our work we’re going to call ‘strengthening resilience,’” Schaeuble said.
That matches the forward-looking message from Schaeuble’s Chinese counterpart, Lou Jiwei, who said in Washington that his country faces a “heavy” task of reform, mentioning changes to social-security and medical insurance systems that are intended to expand effective demand. It also echoes debates going on in Japan about raising the labor participation rate, even at a time when fiscal and monetary policy there are working full-throttle in pursuit of demand.
In short, under a German presidency, the G-20 isn’t likely to be driving toward coordinated fiscal efforts to juice global growth. Instead, along with the IMF it is much more likely to bang the drum ever more loudly for structural reforms.
Yet it’s in Europe where the reform debate is also the most fraught. While there’s been some action of late, such as a labor law reforms in Italy, the to-do list is still long. The lack of action has left European Central Bank policy makers, currently spending 80 billion euros ($90 billion) a month in asset purchases in an effort to stoke demand, exasperated.
“When we say we are the only game in town, it is unfortunate, because the others should move,” ECB Executive Board member Peter Praet said in Washington Friday.
Elections in France, the Netherlands and Germany itself over the next 12 months make enacting unpopular measures like removing privileges for some in the labor market or pushing back retirement ages next to impossible.
So while governments are beginning to admit that they can’t just spend their way back to prosperity, there’s little yet to show for it.
“The G-20 have captured the problems facing the global economy but they’re falling short on action,” said Domenico Lombardi, director of the global economy program at the Centre for International Governance Innovation in Waterloo, Canada. “Germany should use its political clout to galvanize action.”