NEW YORK – Since the 2008-2009 slump lifted in mid-2009 – and especially following the exposure of the massive public-debt problems in Greece, Ireland, and elsewhere in Europe – most G-7 governments have reversed their earlier counter-recessionary positions. With the important exception of the United States, G-7 leaders have been pushing since mid-2010 for urgent fiscal consolidation, effectively overturning their earlier recovery efforts, and urging austerity measures to balance their budgets, despite the weakness, unevenness, and uncertainty of the economic upturn.
Austerity-based fiscal consolidation is likely to fail, because sustainable public budgets are best achieved on the basis of strong economic growth. Indeed, the logic of fiscal consolidation requires those economies that have recovered strongly to phase out their recovery efforts, while those that have not continue such efforts.
The virtual abandonment of recovery efforts in most developed economies presumes that stronger Asian economic growth outside Japan can lift the world economy from its current trajectory. However, even continued strong performance by Asia’s emerging markets is unlikely to be enough to secure a strong global recovery. In fact, the likely renewed slowdowns in the G-7 economies will jeopardize growth in emerging markets as well. This prospect has been ignored, despite warnings by the International Monetary Fund, the United Nations, and others.
Moreover, the shift from recovery efforts to fiscal consolidation and, more recently, to current-account rebalancing, has undermined the initial G-20-led coordinated recovery efforts. Instead, finger-pointing grew more widespread in 2010, impeding policy coordination and cooperation – the very sources of the G-20’s earlier success.