UN calls for Keynsian injection to avert world slump

The United Nations yesterday called for a return to Keynesian economics to avert a deflationary slump that could trigger a violent backlash in the world's poorest nations.

It said rich governments needed to intervene in the economy, spending money and racking up deficits to reverse falls in output and employment. In particular it criticised Europe's fiscal and monetary regime, blaming the "restrictive" Stability and Growth Pact (SGP) for preventing member states from borrowing to fund growth. It also condemned the European Central Bank as "reluctant" to cut rates. Its report was published just hours after the ECB resisted calls to cut rates to offset the surge in the euro.

In its annual report, the UN's Conference on Trade and Development (Unctad) urged governments to abandon "fiscal and monetary orthodoxy".

Rubens Ricupero, Unctad's Secretary-General, said: "There is now a real danger of a liquidity trap emerging, where monetary policy becomes incapable of reversing the falls in output and employment. This is precisely the context in which it is most apt to adopt Keynesian policies to expand liquidity and effective demand."

He warned that unless urgent action was taken, there was a "real threat" that growing imbalances between the richest and poorest in the world could exacerbate the anger felt by millions. "It could deepen the discontent with globalisation ... triggering a political backlash and a loss of faith in markets ... leading to international economic disintegration," he said. "For all countries the prospects for prosperity hinge on international co-operation as well on the intensity of their own efforts."

The downbeat tone of the report was in marked contrast to the cautious optimism expressed by the finance ministers of the Group of Seven industrialised countries and the International Monetary Fund a fortnight ago. Unctad said the world was in a "state of malaise" with the advanced economies struggling to escape the slump. "The world economy is now facing a widening deflationary gap created by deficient global demand," it said.

It added that despite the substantial cuts in interest rates, the US economy was still in danger of suffering a "double dip, jobless recovery". "The danger facing the US is that imbalances and excesses created during the boom of the 1990s could result in a long period of unstable and sluggish growth, with occasional surges as well as dips," it said.

Europe was set to repeat 2003's disappointing growth rate of about 1 per cent, it said, largely due to weak consumption in all major economies.

The ECB yesterday kept its main rate unchanged at 2 per cent. Wim Duisenberg said: "The historically low level of interest rates remains appropriate." He was tackled over the merits of adherence to the SGP, which orders member states to keep their deficits below 3 per cent of GDP. "A recession never justifies a violation of the 3 per cent limit," he said.