Outlook: G7's band aid solution won't work

WHAT DO world leaders mean when they talk about "co-ordinated action" to deal with the crisis in the international economy? Financial markets would like to think it means a synchronised cut in interest rates across the G7 countries; certainly that is what is required to put a convincing floor under Western equities right now.

Unfortunately, it is already plain as a pikestaff that this is not going to happen, not in the immediate future at least. Politicians can presumably still hope to influence the level of interest rates, but they no longer determine them. And the central bankers who do are sticking religiously to their brief, which in most cases is to keep the lid on domestic inflation.

Thus Eddie George, Governor of the Bank of England, was unable to hold out any more than the hope that interest rates have peaked at this week's TUC conference. Hans Tietmeyer, his German counterpart, was more intransigent still. Monetary policy in euroland was just fine, he said, and there would be no cuts. So that appears to be that, for four of the G7 at least.

As for the remaining three, there's no chance of a cut in Canada while the currency remains so weak. And in Japan, rates are already as low as can be without getting into the cloud-cuckoo-land of having to pay the borrower for the privilege of lending to him.

In the end, of course, the only one that really matters is the US. But even here official thinking on policy has yet to shift significantly away from the old priority of controlling inflation to dealing with the new threat of deflation. If Alan Greenspan, chairman of the Federal Reserve, has changed his thinking, he was offering few clues to it in his Congressional testimony last night.

There are, of course, other things world leaders can do to counter the present threat to the international economy beyond cutting interest rates or introducing capital controls. Gordon Brown, the British Chancellor, has been full of them during his visit to Japan. Mr Greenspan was similarly on message during his testimony last night. They could, for instance, bolster the IMF with fresh funds. If Republican opposition in the US continues to frustrate this process, bilateral loans to crisis-torn regions might be possible. There is already talk of such action in the event of the crisis snowballing in Brazil. There are also alternative ways of adding liquidity to markets.

Regrettably, set against the battering ram of interest-rate policy, none of these solutions offer more than a band-aid approach to the problem. It is the job of central bankers to stand above often-exaggerated predictions of disaster and make a considered judgement on these matters, but over the last month, the odds on the emerging markets contagion spreading to the US economy do seem to have shortened significantly. Given the seriousness of the position, it would be unwise of the Fed to test the point.

As George Soros, the international speculator, neatly put it in his testimony earlier this week to the US House Committee on Banking and Financial Services: "Financial markets are peculiar in this respect: they resent any kind of government interference, but they hold a belief that if conditions get rough, the authorities will step in." For the time being that presumption is proving a long way from the truth.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test