The Risk Tsunami

NEW YORK – It is time for the G-20 to take seriously its mandate to agree on steps to stabilize the global economy and launch it on a more sustainable pattern of growth. Instead, the G-20 is behaving like a debating society, with the cooperative approach that it fostered at the outset of the crisis devolving into an array of often-heedless unilateral actions by its members.

Yet there are several significant risks to global economic stability and prosperity that must be addressed urgently. Ireland has thrown Europe into its second sovereign-debt crisis this year, and capital markets have become schizophrenic, with investment rushing back and forth across the Atlantic in response to contagion risk in Europe and quantitative easing in the United States.

Meanwhile, capital is flooding into the higher-interest-rate emerging markets, causing inflationary pressures, driving up asset prices, and subjecting currencies to competitiveness-threatening appreciation – in short, distortions and policy headaches that require unconventional, defensive responses.

Growth and employment forecasts in the advanced countries have been reduced – a delayed recognition of the reality of an extended and difficult recovery and a new post-crisis “normal.” With lower and more realistic growth forecasts, fiscal deficits in the short to medium term are viewed as more dangerous.