Joint economic action
THIS week's meeting of central bankers in Basel, Switzerland, underscores the global resources now available in the era of jet-age travel to resolve the serious economic challenges arising out of the slump on the United States stock market. The Switzerland meeting also highlights sharp policy differences among Western allies and Japan - with many Europeans wary of the US decision to push for lower interest rates, rather than boost rates to prop up the dollar. No new initiatives were announced. Still, the central bankers welcomed the recent European interest rate cuts.Skip to next paragraph
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It is imperative that the Western community reaffirm its commitment to ensuring economic expansion.
Clearly, the global objective should now be growth - rather than seeking to prevent resurgent inflation. The major economies all have room for expansion. Unemployment remains at historic levels in Europe. A recession could only worsen already serious joblessness. Moreover, new estimates for the major trading nations project much slower growth - again, providing latitude for expansion. Revised forecasts by Data Resources Inc. for Europe, for example, show West Germany, France, Italy, and the United States all coming in slightly below or around 2 percent. Japan alone is expected to show growth in the 3 percent or better range.
As we noted last week, the Western allies should consider moving up their regularly scheduled May economic summit a month or two earlier in the year. There can be no justification for nations going their own way on economic policy.
The keystone of current Western policy has been the so-called Louvre agreement reached in Paris earlier this year. At Paris, policymakers from the seven major industrial nations agreed to foster exchange-rate stability. Stability remains important. More essential, though, is flexibility. Some steps of progress in this direction occurred last week when West Germany's Bundesbank lowered the Lombard rate, a key lending rate, and when key lending rates were also lowered in the US, Britain, the Netherlands, Switzerland, and Japan. Bonn and Tokyo must do more to stimulate their export-driven economies.
Among specific goals now called for:
There needs to be an international inquiry into program trading. A policy arm of, say, the Group of Seven should determine if program trading has contributed to current market instability and what corrective steps are needed.
In the US, the White House and Congress must agree on a deficit reduction package of at least $25 billion. But $30 billion to $50 billion would be better. The package should include modest tax increases, cuts in defense spending, and some caps in entitlement programs.
The US Federal Reserve must continue to keep the money gates open for the moment - although with an eye on inflation. The Fed made a mistake in tightening credit too much earlier this year. Consumer confidence is down somewhat following Oct. 19. Thus domestic interest rates must be kept low enough to encourage appropriate, though not reckless, consumer spending.
This is a moment for bold and decisive leadership. The five-year-old expansion need not come to an end.