Writing in the FT, US Treasury Secretary Tim Geithner says that the question is not whether we have the economic or financial capacity to act to strengthen growth, but whether we have the political ability to do the right things.
The biggest constraints on action in the major developed economies now have less to do with those economic realities and more to do with political paralysis, misplaced fears about inflation and moral hazard, and unwarranted disaffection with the efficacy of the traditional fiscal tools of tax cuts and investment to encourage growth.
The three most important things that have to happen for the world economy to regain momentum are these. First, the US should act to strengthen growth and employment. Second, Europe needs to take more forceful action to generate confidence that it can and will resolve its crisis. And finally, China and other emerging economies need to continue to strengthen domestic demand and allow their exchange rates to adjust to market forces.
Financial reforms designed to prevent the next crisis need to be designed and implemented in a way that does not exacerbate the slowdown. We need more progress in rebalancing global demand, with broader and faster appreciation of the remnimbi and the other policies necessary to strengthen domestic consumption in China and other emerging economies with large external surpluses.
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