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One leading antirecession idea for the moment is a global fiscal stimulus amounting to 2 percent of the planet's GDP. The world's leading economies are still making their calculations, but their efforts obviously assume a big stimulus in the United States and a pretty big fiscal expansion in Europe. (Emerging markets will barely be able to make a contribution that registers on the global scale.)
What are the likely prospects for a major eurozone fiscal stimulus? My presentation yesterday on this question is here. The main points are:
The pressure is especially difficult for euro sovereigns with relatively weak fiscal positions. This may not seem fair, in the sense that the crisis started far away (in some sense), but that is how crises work.
Whether or not the global recession is bad, countries like Greece and Italy—as well as Portugal, Ireland, and Spain, making up a set of countries now known in the markets by the unfortunate acronym PIIGS—are being pushed toward urgent fiscal austerity, i.e., the opposite of expansion.
They could, of course, get some sort of help from stronger eurozone members, for example in the form of much lower interest rates. But this does not seem to be immediately in the cards.
The reaction that one hears from senior European officials and richer eurozone countries is that Greece (and Italy and others) should deal with their fiscal problems. There is very little sympathy for them and even less bailout money. This is in striking contrast with the attitude—and willingness to open pocket books—shown toward East-Central Europe, which is currently being treated more as a set of innocent bystanders.
It is hard to see how to pull a large, global, fiscal stimulus rabbit out of the hat. Pursuing expansionary monetary policy in the United States and elsewhere is much more likely to have first order effects on industrial countries and, through them, on the world's economy.
Asking for a major push on fiscal policy is not a bad thing in most contexts. But it does encourage free riding, i.e., you go build a lot of roads and bridges and I'll recover through exporting vehicles and machinery to you, which appears to be the current German strategy.
Getting the G-7 or G-20 to really coordinate on fiscal stimulus is rather like OPEC trying to coordinate oil production cuts. Both are really hard to do in a severe downturn, particularly as budget pressures mount.
Adapted from Simon Johnson's blog, Baseline Scenario.
