LONDON: World policymakers will gather in Washington later this week to ponder how to sustain economic recovery at a time when the United States is about to turn off its money taps.
Given the same G20 finance ministers and central bankers met in Australia only two weeks ago, it is not hard to guess how the debate will go: most of the Western world will urge the eurozone to do more to foster growth and Germany will warn against letting up on austerity.
That debate has circled within the G20 for three years and is fizzing now in Europe with France, Italy and others pressing for a loosening of fiscal strait-jackets to allow time for economic reforms, in defiance of Berlin’s wishes.
“Existing flexibility within the rules should allow governments to address the budgetary costs of major structural reforms, to support demand and to achieve a more growth-friendly composition of fiscal policies,” European Central Bank president Mario Draghi said on Thursday after a monthly policy meeting.
The Federal Reserve will end its programme of bond-buying with new money later this month, a prospect that has already driven the dollar higher and created jitters about a reversal of money flows out of emerging markets back into the US.
The eurozone in the guise of the ECB has been doing its best to come up with new stimulus, though it has shied away from full quantitative easing so far.
Its most effective card may be euro weakness, the flipside of dollar strength. The euro is down almost 10 per cent from a peak against the dollar in May.
With US money printing about to end and speculation about the timing of a first interest rate rise, there are good reasons to think this trend could continue.
The strong US jobs report on Friday did little to change the picture.
“I don’t think it changes the Fed dynamics. I still think the first rate hike is maybe mid-year,” said Kim Rupert, managing director at Action Economics in San Francisco. “We are trying to gauge whether it’s March or June.”
If the euro keeps falling, it would push the prices of imports up while making it easier for eurozone countries to sell abroad, which should have an upward impact on both growth and inflation.
The impact won’t be immediate though, as last week’s inflation reading of just 0.3 per cent demonstrated. Reuters