It is time to start thinking beyond Greece – as the Group of Seven summit in Bavaria will this weekend. These economic summits go back almost 40 years, when the leaders of what were then the world’s largest six economies – the US, Japan, Germany, France, the UK and Italy – were invited by the French president Valéry Giscard d’Estaing to the Château de Rambouillet, just outside Paris, in November 1975. The purpose was to discuss how they might pull together to help the world economy recover from the oil shock of 1973-4. Canada, and then Russia, joined later to make up the G8. Now, thanks to the misbehaviour of President Putin, we are back to a G7. Russia, never naturally a member, has been excluded.
Although the G7 no longer reflects economic might – China is now the No 2 economy – the leaders do have to confront a comparable threat to that of 1975. Then it was the surging oil price and the threat of runaway inflation. Now it is a developed world overburdened with debts that threatens to undermine the recovery.
The disadvantages of the ultra-easy monetary policies that have fuelled the recovery are becoming more and more evident, particularly their impact on wealth inequality within the developed world. Assets have soared in value: the German stock market is up 20 per cent since the European Central Bank started its quantitative easing programme late last year. But those with few assets have been left behind. The protesters in Munich over the past few days have a point, though I doubt many of them have thought through the link between QE and inequality. Yet tightening policy and raising interest rates sharply might kill the recovery. It would certainly make the difficulties of Greece seem a sideshow, which in the broader scheme of things, of course, it is.
Why then have the difficulties of Greece, which accounts for about 0.3 per cent of the world economy, loomed so large? The obvious answer, aside from the fact that many of us know and like the country, is that it exemplifies in extreme form the stresses created by a single European currency, with political expediency trumping economic common sense. Less obvious, and more alarming, is the extent to which debt overburdens the entire world economy. Greece is an extreme example of a global phenomenon. We all know what has happened here, with the national debt still rising both in absolute terms and relative to GDP. But while the details differ, the same broad pattern applies to almost every major developed economy, as it does to China. Of the large economies only Germany is running a budget surplus, and even Germany faces a problem servicing its debts with a declining workforce and rising ranks of retirees.
Similar pressures apply at a personal level. In some countries (including the UK) families have started to pay down their debts; in others this has happened very little. After all, with money sprayed around at near-zero rates by mortgage-lenders, why wouldn’t you borrow more, and pay more, for a bigger house? Too-easy money encourages people to make bad investment decisions, just as too-easy money encouraged Greece to do so when it managed to scramble into the eurozone.
So what’s to be done? It is easy to work up a sense of despair, particularly since the world economy faces other headwinds – particularly from demography and the environment. But the experience after that first economic summit is broadly encouraging. It did not of itself fix anything. The humiliation of Britain’s bailout by the IMF followed the next year, and the final burst of global inflation of the late 1970s was still to come. Then followed the long monetary squeeze, led by the chairman of the US Federal Reserve Board, Paul Volcker. High interest rates did for high inflation, but it took the best part of a decade.
The good news is that we don’t need high interest rates now, or at least not the double-digit ones we had then. We do need higher ones, as the bond markets recognised last week, pushing up rates sharply. A rise in long-term rates puts pressure on central banks to increase short-term ones. The IMF wants the Fed to hold off its first rise in short-term rates until next year. The bond markets think otherwise.
As rates rise, there will have to be debt relief for those who genuinely cannot pay. That, of course, includes Greece. Lots of great things are happening in the world economy, in particular the use of technology to make service industries more productive, and that will drive underlying growth. But we have to deal sensibly with debt. Economic summits tend to get hijacked by politics, but if this one nudges our political leaders to understand that debts must be tackled head on, it will have done a useful job.Reuse content