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The Importance of Policy Continuity

Posted on the 12 October 2012 by Periscope @periscopepost

On October 4, there was an interesting and in some ways provocative article in the Economists’ Club section of Project Syndicate, a substantial global think tank, available in a number of languages. The article, written by Nobel prize-winning economist, Joseph Stiglitz, was entitled Monetary Mystification.

Some of Stiglitz’s opinions on the central banks, such as “monetary policy has proven ineffective,” seemed unsupported by recent events, unlike his argument on the pace of debt reduction; and my comment hoped that in future, reduction and non-debt increasing growth stimulus would work side by side, helping to prevent reduction policy proving too much for certain recipient countries, particularly in the Eurozone.

After writing this comment, my thinking focused on the number of warning postings and articles there have been lately at a very high level. On October 11, for example, Christine Lagarde, IMF Managing Director, called for Eurozone action to deal with the “terrifying and unacceptable” rate of unemployment in the single currency. The same day, Vitor Constancio, ECB Vice President, recommended careful monitoring of reduction programmes, adding that that “the whole balance has to be continuously under observation.”

So do we need to change course, or is it more a question of amending speed and intensity rather than direction?

If Eurozone policy, drawn up for dealing with the crisis, is essentially sensible and workable, perhaps there is a case for a degree of adaptation so that allowances are made for any harmful effects it may have. In fact, having agreed that proviso, there seems considerable benefit in not deferring the policy, or permitting it to reach an impasse, when it could be going through its implementation.

This concept of fulfilled policy assumes a strong element of continuity, especially in those nations whose economic standing affects global well-being. Where policies are valid, but only partly implemented, dislocation could have the effect of elongating the crisis, instead of dealing with it.

To lessen this risk, those already implementing reduction and recovery policy should have the space and time to see it through; policy change would be more appropriate when persistence and situation response have worked their way to reduced debt and increased growth. Potential examples might include Japan, where the government mandate ends in August 2013; the US, where fiscal cliff avoidance and support for the Federal Reserve stimulus have the potential to accelerate recovery, now on the cusp of noticeably improving; and the UK, where the immediate continuity of a reduction and enabling growth policy is more certain.

Policy continuity in the Eurozone is less straightforward, but that could be remedied in several ways, two of which are reasonably urgent. First, there could be action to extend programme timescales where needed, so that member states making serious efforts to keep to agreements should not be pushed beyond what is practical. Second, there could be a reversal of the triple A euro countries’ hesitation about ESM direct recapitalisation of Spanish banks. If this were decided, Spain might be encouraged to make its request and OMT would go live. This would enable a significant breathing space, during which the reality of getting fiscal union through parliaments could be fully assessed and planned for, under far less pressure than at present.

Debate is very useful in the present global economic situation, but action is even more necessary, particularly that in furthering the continuity of effective policy. Certainty and a sense of direction are vital in fostering recovery and successful debt reduction; which makes the fulfilment of policy that stabilises the global economy highly important.

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