Some say the message may be more effectively conveyed by International Monetary Fund Managing Director Christine Lagarde when she replaces Draghi in November. She’s already said that in the next slump, “fiscal stimulus wherever possible” will be needed. BOE Governor Mark Carney, a potential candidate to succeed Lagarde at the IMF, has also pushed the idea.
Their calls have additional weight given the collapse in global bond yields, making it cheaper for governments to borrow. In Europe, much of the focus is on Germany: Not only does it have a budget surplus, but investors will pay it to borrow for up to 15 years.
The big difficulty is high debt ratios. France’s, for example, is close to 100% of output, while Italy’s is even higher.
One euro-area solution, according to the OECD, would be to coordinate fiscal stimulus in some countries with structural reforms in others, in tandem with loose monetary policy. It estimates that a joined-up effort would raise GDP growth by around 0.75 percentage point in this year and next.
It could be in time that central banks and governments do end up uniting if more leftwing parties win election. Some lawmakers in the U.S. and U.K. have promoted Modern Monetary Theory, which posits that countries which control their own currency can seek stronger economic growth via government spending.
“If current non-conventional policies have been a leap forward from traditional measures, the future political landscape could warrant an even more radical shift,” said Alberto Gallo, head of macro strategies at Algebris Investments.
In the meantime, G-7 officials may look to the last crisis, when their governments pulled back from stimulus too quickly. The world economy had barely escaped recession when policy makers meeting in early 2010 agreed to “look ahead to exit strategies and move to a more sustainable fiscal track.”
“For most advanced industrial countries, the monetary policy space is extremely limited,” said Willem Buiter, a former Bank of England policy maker now special economic adviser to Citigroup. “We need the fiscal tools to safeguard ourselves against a possible slide into a global recession.”
Bloomberg News.