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Yet, after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile. In too many countries debt and public spending are high, and interest rates close to zero. This leaves little room for effective policy when the next crisis hits — as it surely will. [...]
Yet this lesson goes largely unheeded; policymakers are urged to pile more debt on the existing mountain. Never mind that the effect on growth is becoming smaller and smaller. Never mind that zombie banks and enterprises — which would go under if interest rates were higher — barely invest, which undermines long-term growth prospects.
The work of repairing public sector balance sheets has ground to a halt almost everywhere. What governments save, because debt service costs are low, they often spend. Public debt in many countries is now well above 100 per cent of gross domestic product. This would have been unthinkable a decade ago.
The myopia in macroeconomic policy contrasts with much more convincing global action to repair the banking sector. Here, rebuilding resilience has been the motive for regulatory reforms and capital accumulation in recent years. Banks seem much more robust than they were before Lehman.
Such an approach is also needed for public finances. Nations such as Germany have a strategy geared towards resilience, but face criticism for it. [...]
Germany’s sound public finances are also the basis for European stability. Without guarantees and support from Berlin, the €500bn European Stability Mechanism, meant to protect against future crises, would not be credible. Were it not for the strength of Germany’s economy and balance sheet, the European Central Bank would have much less scope to use unconventional policies and remain credible. Not to mention the fact that Berlin is one of the largest contributors to the EU’s €150bn annual budget, a significant part of which is transferred to the poorer countries of Europe and beyond.
In the increasingly globalised economy, nations lacking resilience increasingly rely on support from others who fear that, unless they commit their own resources to fighting faraway crises, they will find themselves engulfed by the gathering storm. This creates a new form of moral hazard: since countries that behave recklessly will be bailed out, they have little incentive to reform.
The Group of 20 leading nations and the IMF should aim to make the international financial system strong by improving the resilience of their members. Unless they do, talk of global safety nets is futile, and focusing instead on stimulus is outright frivolous.