The European debt crisis highlights the “critical imperative” for governments to leave stimulus spending behind and chart a path toward fiscally sustainable growth, a senior Finance Department official said Thursday.
Speaking at a conference in Ottawa, Tiff Macklem – Finance’s point man at international summits – said debt-reduction plans should be sped up and crafting a framework for balanced global growth will be a key priority for the Group of 20 nations when they meet in Toronto next month.
“We're starting to come out the other side and clearly it’s going to be time to be looking very seriously at elaborating clear fiscal exit strategies,” Mr. Macklem said.
Referring to the imbalances that exacerbated the U.S. financial crisis and in 2008 helped turn it into a worldwide credit crunch and recession, Mr. Macklem – who becomes senior deputy governor of the Bank of Canada on July 1 – said there needs to be a “rotation” of global economic expansion.
With European nations forced to apply some vicious belt-tightening measures in the coming years, the need for the faster-growing emerging-market economies to fill the gap left by lower demand elsewhere is all the more important, Mr. Macklem suggested.
During the years leading up to the recent crisis, exporters everywhere became dependent on debt-laden American consumers who spent with abandon in part due to a false sense of security about the value of their homes. In addition, countries such as China blocked the U.S. from moving beyond consumption-led growth by using their vast reserves to depreciate the value of their currencies against the dollar, which ensured their goods were cheap and attractive to Americans.
Calling last weekend’s European bailout package “bold” and a welcome step, Mr. Macklem said ways to prevent future crises will be a very important issue going forward.
In a question-and-answer session after his presentation, Mr. Macklem said the G20 also needs to make sure it keeps up the momentum on new regulations for the financial sector.
Earlier Thursday, the second-in-command at the U.S. Federal Reserve Board told the conference that potential asset bubbles are better dealt with through regulation and oversight of the financial system than central banks raising interest rates.
Donald Kohn, the Fed’s vice-chairman, said monetary policy is too blunt a tool with which to try and affect a specific sector of the economy, so central banks should be more focused on goals such as stable inflation and high employment than financial stability.
“Regulation can be better targeted to the developing problem, and the balance of costs and benefits from using these types of instruments are far more likely to be favourable than from using monetary policy to achieve financial stability,” said Mr. Kohn, who retires from the Fed late next month.
At the same time, Mr. Kohn said he doesn’t “minimize the difficulties of executing effective macroprudential supervision” and wouldn’t rule out using interest rates in situations where “dangerous imbalances” are building or where regulations are delayed or ineffective.
Low interest rates set by former Fed Chairman Alan Greenspan are widely considered to have contributed the housing bubble that ultimately triggered the U.S. financial crisis in 2007-08. Mr. Kohn didn’t address that notion explicitly.
On the subject of keeping interest rates low for long periods, Mr. Kohn said central banks that make pledges to do so must ensure such commitments aren’t interpreted as unconditionally open-ended.
With files from Dow Jones and Reuters
