The Group of Seven (G7) and the International Monetary Fund (IMF) have recognised the need for tough reforms to ease economic imbalances threatening the global recovery, but governments will need political courage to press on with the painful changes.
At their meetings in Dubai, the G7 and the IMF painted cautiously optimistic pictures of the emerging recovery, but warned that the upturn could still be undermined by the glaring imbalances between economies across the world.
”Risks remain in many countries and it is important that policymakers stand ready to take the necessary policy actions,” the IMF’s financial committee, made up of finance ministers and central bank chiefs, said in a communiqué.
The United States is charging ahead of the other developed economies, but its high growth rates have come at a price — record current account and budget deficits.
The growth gap between the US and the euro zone, where three countries are still mired in recession, has grown to the extent that policymakers on both sides of the Atlantic are concerned the disparity is a menace to the medium-term health of the economy.
”The US has emerged as the only real engine of growth in the G7 … and this is troublesome,” US Treasury Secretary John Snow said in Dubai.
German Finance Minister Hans Eichel agreed that Europe could no longer depend on the US as being the sole engine of world growth.
”We all have a common obligation to carry out. We all have our own possibilities to contribute towards sustainable growth,” he said after the G7 meeting.
But for Europe to improve its growth rates, the continent needs to undertake tough structural reform to free up its inflexible labour markets, reduce bureaucracy and shake up pension systems to cope with an ageing population.
Traumatised by the effects of the slowdown, Europe has at last started to take action.
The French government this summer rode out stubborn union protests to push through a gradual but hotly disputed reform of its pension system, which threatens to collapse under the pressure of the ageing population.
After a cautious first term in office, German Chancellor Gerhard Schroeder has embarked on an ambitious reform programme to reduce the country’s high jobless totals and improve its diabolical growth rates, the worst in the euro zone.
”I do not think that it is enough, but I see France and Germany in a new mood of recognition that these three big countries in monetary union must lead through structural reforms and not be at the lower end of this process,” said IMF managing director Horst Koehler.
”If this happens and there is a new momentum I am altogether not pessimistic about Europe,” he added.
But more work lies ahead. At the end of their meeting on Saturday, the G7 published an ”Agenda for Growth” as an annex to their main statement, outlining specific steps the seven rich countries (Britain, Canada, France, Germany, Italy, Japan and the US) must take.
Although Europe has a well-earned reputation for a lack of reform, tackling the US deficits and the Japanese banking system are also priorities to ensure the world economy can grow at a consistent and sustainable pace.
”In the United States … fiscal policy will need to focus on strengthening sustainability in the medium term,” the IMF committee’s statement said.
”In Japan, continued efforts will be necessary to strengthen the banking and corporate sectors to end deflation,” it added. — Sapa-AFP