With the world racing toward austerity, the resulting policies could spill over into another global recession, warns Adam Posen, the new head of the Peterson Institute of International Economics, a Washington, D.C.-based think tank.
Posen, a former external member of the Monetary Policy Committee of the Bank of England, is calling for a coordinated global effort to ease back from austerity, according to The Washington Times.
Whether or not governments tightening their belts is the proper approach for resolving their economic dilemmas is a widely debated issue.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
Anders Aslund, a senior fellow at the Peterson Institute, praises austerity as working better than stimulus to heal economies. In an article for Bloomerg, Aslund compared Latvia and Greece, describing them as “two small countries hit the worst by the crisis.”
He argued that in 2008 and 2009, the financial crisis actually looked far worse in Latvia than it did in Greece, but the countries chose opposite policies — Latvia strict austerity, Greece late and limited austerity.
“Yet Latvia’s economy grew by 5.5 percent in 2011, and in 2012 it probably expanded by 5.3 percent, the highest growth in Europe, with a budget deficit of only 1.5 percent of GDP [gross domestic product]. Meanwhile, Greece will suffer from at least seven meager years, having endured five years of recession already. So far, its GDP has fallen by 18 percent,” he said.
“The lessons are clear” Aslund declared.
However, Posen takes the position that there is too much fixation on Greece and it is driving a dangerous race.
Greece's fiscal problems are pressuring the world's leading governments into a “least-ugly contest” where they try to outdo one another with tighter monetary policies, but the effects of such actions could be dire for growth, Posen told reporters, The Times reported.
“I think an important aspect of the international scene since early 2010 has been a least-ugly contest among the major economies of everybody saying, ‘I don’t want to be Greece. Somehow, I convinced myself I could look like Greece, so therefore, I am going to outbid comparable countries on austerity, in order to do this,’” he said.
“The most important thing is that the international spillover when everyone tightens up at the same time are quite large,” he added.
Posen said that countries must pay their bills, but he warned that too much austerity is risky and encouraged a different approach.
“The question is: ‘Can we in a somewhat coordinated way bid it down a bit, or spread it over more years, and thereby remove the incentive of the least ugly contest to make each other look bad, and get a more beneficial outcome for everyone?’” he said.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
© 2013 Moneynews. All rights reserved.