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The first-speed group
The first speed group comprises, essentially, the emerging markets and developing countries. These countries entered the crisis from positions of strength, and are still in positions of strength. In a world of too much bad news, we do not hear enough about this good news. In fact, over the past half decade, the emerging markets and developing economies have led the world’s recovery, accounting for three-quarters of global growth. Today, developing Asia and Sub-Saharan Africa are the two fastest-growing regions of the world. Moreover, a recent IMF study suggested that today’s growth in the low-income countries is more robust that in the past, and less vulnerable to pitfalls and setbacks.
These countries need to implement policies to protect what they have accomplished—and stay strong. In part, this means looking inwards and getting to grips with domestic vulnerabilities and structural obstacles to sustained growth—including infrastructure and regulatory bottlenecks, as well as governance. It also means looking outwards, keeping a watchful eye on spillovers from the advanced economies, especially from an extended period of unconventional monetary policy.
The second-speed group
The second speed group—countries that suffered through crisis, but are now on the mend. This includes the United States, plus also countries like Australia, Canada, New Zealand, Sweden and Switzerland. The bottom line is clear: while fiscal adjustment might be too aggressive in the short term, it is certainly far too timid in the medium term. At this point in the recovery, it is more important than ever to put in place a credible, medium-term roadmap to bring down the debt—a balanced plan made up of savings in entitlement spending plus additional revenues. This is the major policy challenge facing the US today—and it must be met. Otherwise, the substantial gains that have been made can be too easily lost.
The third-speed group
The third speed group—the countries that still have some distance to travel to recovery. This group includes the euro area and Japan—although Japan is looking somewhat stronger today than even a few months ago.
Let me start with the euro area, first by acknowledging just how far it has come in a short space of time. Consider the list of achievements: the European Stability Mechanism, the ECB’s Outright Monetary Transactions, steps toward a single supervisory mechanism, and the agreement to help relieve the debt burden of Greece, not to mention the nascent European banking union. Yet the euro area economy is still stuck in low gear. Activity has continued to shrink in the beginning of this year, and we expect negative growth—of -0.3 per cent—for the year as a whole. Overall, the region is operating at “zero speed”.
Going forward, the indicators are not encouraging either. Lending to firms is rising only gradually in countries like Germany, and not at all in countries like Italy or Spain. The periphery is still mired in recession, with financial conditions that are unduly tight. Unemployment is still rising. This weakness—combined with lingering uncertainty over the euro area growth outlook and the evolution of euro area institutions—is draining momentum even from countries like Germany and France.
Beyond this, the euro area needs a real banking union to strengthen the foundations of monetary union. This means complementing the single supervisory mechanism with a single resolution authority, and deposit insurance backed by a common fiscal backstop.
Turning to fiscal policy: while fiscal consolidation is still necessary, it is essential to pace it well. Countries under market pressure have little choice but to stick to a consistent and steady path of adjustment. But elsewhere, the pace should be attuned to the speed of recovery, as the Europeans themselves are increasingly recognising.
Some euro area countries also need structural reforms to unleash competitiveness. With this package of policies, I believe that the euro area can get its growth engine up and running again.