There are good reasons for feeling better about the world econom´s prospects. But they need to be put into context. Most economists would agree that institutions in general are incredibly important in helping to shape countries’ overall economic and fiscal outcomes. But which institutions really matter, and to what extent, is less clear.
Press release from 62nd Bilderberg conference stated: Is the economic recovery sustainable? as one of the key topics for discussion at this years Bilderberg Meetings taking place from 29 May until 1 June 2014 in Copenhagen, Denmark.
- Bilderberg meetings or Bilderberg Club is an annual private conference of approximately 120-150 political leaders and experts from industry, finance, academia and the media. Founded in 1954, Bilderberg is an annual conference designed to foster dialogue between Europe and North America.
The global economy is turning the corner of the Great Recession, Global activity strengthened during the second half of 2013 and is expected to improve further in 2014–15. The impulse has come mainly from advanced economies, although their recoveries remain uneven. With supportive monetary conditions and a smaller drag from fiscal consolidation, annual growth is projected to rise above trend in the United States and to be close to trend in the core euro area economies. In Japan, fiscal consolidation in 2014–15 is projected to result in some growth moderation. Growth in emerging market economies is projected to pick up only modestly.
In 2013, global growth was about 3 percent; IMF project modest improvements in 2014 and 2015, although still remaining below past trends.
Economic activity in the advanced economies is improving, albeit at varying speeds. This is good news, because for the past 5 years the emerging market and developing economies have been shouldering the burden of recovery—accounting for 75 percent of the increase in global growth since 2009.
The recovery is finally becoming a bit more balanced, in an overall economic landscape that has changed significantly. As discussed at press conference of the IMF World Economic Outlook April 2014 report , the U.S. economy is gaining strength, setting the stage for the normalization of monetary policy.
In Europe, eurozone, better policies have led to substantial improvements in market confidence in both sovereigns and banks. In the Euro Area, a modest recovery is taking hold—stronger in the core but weaker in the South. The trade deficits of the south mirrored the profits of the north.
The single currency served Germany well by cooling down its economy. The improvement has been clearest in the central region, which has benefited mainly from faster growth in Germany and the stabilisation of the euro zone economy and banking system.
Encouraging steps have been taken recently to establish a banking union. The reforms needed to make the euro and banks work are more or less complete. In the course of the past week, the results of the elections have been announced, an informal European Council has been held, negotiations about the presidency of the European Commission have begun, and the political parties have started re-ordering the composition of groups in the next Parliament.
Our PM Reinfeldt and European Council colleagues give the Presidents of the European Council and the European Commission – Herman VAN ROMPUY green light to start consultations on next COM President given him a mandate to conduct these consultations.
Over the years, financial regulation has become largely determined at the EU level, even though national differences persist. The financial sector itself has increasingly transcended national borders. Supervision of the sector had not followed this trend, as it remained a national prerogative.
The same holds true for the management of problems and crises in the financial sector. No country can go it alone. National prosperity and global prosperity are linked; they depend, more than ever before, on working together. This means that, as economic recovery in Europe is underway efforts to prevent future crises must continue, not leas through the further deepening of the euro area and through exploiting all levers for growth. Internationally, the crisis in Ukraine is showing how important a united European position is.
Recent years have brought considerable improvement in the east European investment climate. However, many east European countries in the region (Ukraine government , part of it) still face fundamental reform challenges. The crisis of 2009 had a longer-lasting negative impact in some areas, with policy deficiencies in some countries exacerbating this vulnerability.
The Ukrainian economy has been in recession since the second half of 2012, with only one quarter of positive growth at the end of 2013, which was quickly reversed in the first two months of this year as a result of the deterioration of the political and security situation. The Ukrainian government lost access to international financial markets during 2013. EU presented support package proposed by the Commission with a number of concrete economic and financial measures to assist Ukraine. Pressures from Russia continue to bear upon Ukraine.
That is why, on 14 April 2014, at a meeting of the Foreign Affairs Council in the European Union agreed to expand sanctions and to complete preparations for far-reaching economic, trade and financial sanctions whenever necessary in the future. The Foreign Affairs Council also adopted a decision in macro-financial assistance to Ukraine to support its economic stabilisation and its structural reform agenda.
The loans are intended to help Ukraine economically and financially in view of the critical challenges the country is facing, notably a very weak and rapidly worsening balance of Energy payments and fiscal situation, which has been worsened by the crisis. In addition to this mechanism EU stand ready to host trilateral consultations with the Russian Federation and, subject to the agreement of the Ukrainian government, with Ukraine on energy security as EU have proposed already in the past.
The EU is going from one test to the next. But, every new challenge has taken the Union forward, not backward. There is also a particular need for euro area countries to work closer together to make policy decisions that take into account the wider interest of their fellow members. With EPP we stand for fiscal consolidation implemented in a growth-friendly manner and we need to strike the right balance between fiscal consolidation in the Member States and growth-enhancing policies, which support the real European Economy Recovery and help to create new, stable jobs, in order to tackle high unemployment rates and protect social cohesion.
Much closer to the real agenda for Greece’s recovery has been the EU Commission’s Taskforce for Greece. Greek economy is now back on its feet and should be supported by reforms that aim to achieve a more equitable distribution of wealth. Liberalisation of labour markets has enabled Greece to close the cost-competitiveness gap with other southern eurozone countries by about 50 per cent over the past two years.
A different line of argument, consider how the process of macroeconomic demand management is influenced by the broader institutional and political environment in which it takes place. The 2012 annual report of the NGO Transparency International named Greece as Europe´s most corrupt country. Putting the debt crisis behind Greece means breaking with the past that caused it.
Greece need to be working for social justice, equal rights, political and fiscal transparency in other words, democracy. By democracy we usually mean a government comprising popular rule, individual human rights and freedom, and a free-market economy.
Such a project can only be carried out by a party that is independent form financial oligarchy that is responsible for the crisis. If policy credibility is a problem, strengthening the transparency and consistency of policy frameworks may be necessary for tightening to be effective.
How do we achieve higher quality, more sustainable growth that is more broadly shared?
According to IMF:s Christine Lagarde Managing Director, “We first need to fix problems that have been with us for some time during the crisis”- It means more and better-targeted investment, more labor market reforms, and more product market and services reforms.
While stronger growth prospects and market sentiment are welcome, there is still much to do to solidify and pick up the pace of the recovery, not least because unemployment remains unacceptably high in too many places, especially young people.
Over the past decade the distribution of wealth has increasingly favoured capital over labour, in which the corresponding accumulation of capital has led to a corporate saving glut, rather than an investment.
- The economic policy priority is to achieve a soft landing on the transition to more inclusive and sustainable, private-consumption-led growth.
The economy suffers from both sides, weak income growth and weak investment. Labour´s share of output is now at historic lows, and may be at levels that are suboptimal to foster economic growth.
Governments are now getting wise to this. All EU Member States have presented national Youth Guarantee Implementation Plans, and their implementation is now starting, but boards and shareholders have also a role to play here. They are able to resist this trend, and executives can be pressed to ether invest or distribute the excess cash flow.
High levels of debt—meeting the challenge of fiscal consolidation while safeguarding growth; and Financial uncertainty—completing the reforms necessary to place the global financial system on a sounder footing. While some progress has been made on each of these, none has yet been overcome. The economic, fiscal, and monetary policies are a big part of the solution.
High and rising debt is a source of justifiable concern. We have seen this recently, as first private and now public debt have been at the centre of the Eurozone crisis, which began in Greece in 2009. Data bear out these concerns – suggest a need to look comprehensively at all forms of non-financial debt: household and corporate, as well as government.
Result for government debt has the immediate implication that highly indebted governments should aim not only at stabilising their debt but also at reducing it to sufficiently low levels that do not retard growth.
Early steps are required if public debt is already elevated and the associated refinancing needs are a source of vulnerability. On the fiscal front, policymakers must lower budget deficits, although the urgency for action varies across economies.
Economic impacts of fiscal policies depend on the mobility of the resources to which these policies are applied. Bold policy steps are needed to avert a low growth trap. Fiscal competitions has significant implications for the public sector. Often the public sector lags behind the private sector with accounting reforms. In particular, jurisdictions with limited geographic scope, like the governments of small municipalities are, in general, likely to face greater competitive pressures than larger ones like large countries.
Political economy also differed from public choice by taking a balanced view of market and government economic forecasts biased. The challenge for policymakers is to see how traditional economics, public choice and political economy relate to each other to manage the transition.
Fiscal competition seek to ascertain how fiscal policy-making is affected by competitive pressures faced by governments. Such analyses may be useful for evaluation, but, at base, the theory of fiscal competition requires a theory of policy choice and institutional change.
- Evidence points to effectiveness of institutions— and Strong Budget Institutions.
Countries with stronger institutions overall seem to recognize the need for fiscal adjustment, in line with the IMF’s assessment of the required consolidation effort , while countries with strong implementation institutions carry out much more of their announced adjustment plans than countries with weak institutions.
It is also remarkable that countries with strong budgetary planning institutions tend to develop and announce their adjustment strategies more rapidly and protect capital expenditure—important for long-term growth—more successfully during consolidation.
To be clear, the term “institution” is used in a broad sense—it encompasses processes, procedures, systems, legal frameworks, and organizational entities which contribute to the budget process.
Fiscal discipline and stability play an essential role in safeguarding economic and monetary Union. The accurate, reliable and comparable reporting of fiscal data is essential for monitoring and communicating this stability.
A team of staff at the IMF recently completed a study, along with detailed country evaluations, that explores the G-20 countries’ efforts to strengthen their budget institutions in the wake of the global financial crisis, and evaluates their impact on fiscal policy.
For example, the fiscal reporting system can be seen as one of the important institutions for identifying the fiscal difficulties a country may face.
If fiscal reports do not cover large parts of the public sector, are not timely, or there are few assurances of the integrity of the data, the fiscal reporting institution is assessed as weak.
In this fashion IMF-group identified for all 12 institutions criteria that helped us to assess the relative strength of the institutions.
- Reform effort uneven:
Finally, the model focuses on reforms combined impact of all fiscal policies: Looking at the type of reforms that have been popular it is clear that independent fiscal agencies, fiscal objectives and rules, and medium-term budgetary framework have been the flavor du jour of budget reforms since the crisis.
These reforms have been important in making economic forecasts less biased, fiscal frameworks more credible, and fiscal policy more sustainable. They were also an essential part of making fiscal policy coordination possible in the eurozone. Reforms requiring relatively more administrative or political effort have seen less progress, both in advanced and emerging economies.
- Advanced G-20 economies, especially those in Europe, and those with specific consolidation plans seemed to have been the strongest reformers.
- Emerging market economies did relatively well on improvements in fiscal risk management and performance orientation, but, overall, there has been a widening of the gap in institutional strength between advanced and emerging G-20 countries.
So bottom line—institutions matter—and G-20 countries would do well to continue to reinforce their institutional architecture for fiscal policymaking.
More recently, the emerging risk of what IMF call “lowflation”, i.e., of a large and persistent undershoot relative to the ECB’s medium-term inflation target of 2 percent. Persistently low inflation puts pressure on debtors, real lending rates, relative price adjustment and jobs. Continuously low inflation is a worry for the region’s southern flank, where debt burdens are high.
At 0.7 per cent, inflation is now a little over a third of the ECB’s target of below, but close to, 2 per cent and has consistently undershot both the central bank’s and economists’ expectations over the past six months. Some believe this will force the ECB to take further measures at its next monetary policy meeting in June, though a bout of quantitative easing, where central banks buy assets outright, remains unlikely for now.
- Policymakers in advanced economies need to avoid a premature withdrawal of monetary accommodation. In an environment of continued fiscal consolidation, still-large output gaps, and very low inflation, monetary policy should remain accommodative.
In the euro area, more monetary easing, including unconventional measures, is necessary to sustain activity and help achieve the European Central Bank’s price stability objective, thus lowering risks of even lower inflation or outright deflation. Sustained low inflation would not likely be conducive to a suitable recovery of economic growth. (IMF World Economic Outlook April 2014).
More monetary easing, including through unconventional measures, is needed in the Euro Area to raise the prospects of achieving the ECB’s price stability objective. The IMF welcome the attention the ECB is paying to this risk, and its recent statement stresses that it is considering further action, including unconventional policies within its mandate.