Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jumpstart stalled economies

Gary Duncan on The Times with the head of the IMF's take on the EU Stimulus:

"Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday."

I guess you could say that this is one of my main concerns.

"Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.

The broadside from the IMF's managing director came as fears over a protracted global recession, and political fallout, mounted after China said that its factories' output registered the weakest growth in almost a decade last month.

Without swifter and more determined action by governments to boost economies, a world recovery could be delayed until late next year or early in 2010, with grave consequences, Mr Strauss-Kahn said. “A lot remains to be done, and if this work is not done it will be difficult to avoid a long-lasting crisis that everyone wants to avoid.”

I tend to agree with him.

"The IMF has called for governments in leading economies to spend a combined 2 per cent of global GDP, or $1.2 trillion (£1,075 billion), to try to fend off the danger from global recession.“If we are not able to do that, then social unrest may happen in many countries - including advanced economies,” Mr Strauss-Kahn suggested.

He also claimed that violent protests could break out in countries worldwide if the financial system was not reordered to benefit everyone rather than a small elite."

This is one of my main fears.

"Reinforcing anxieties over a global recession, the IMF chief said that the fund would probably cut its current 2.2 per cent forecast for world growth next year. He blamed governments' being unwilling or unable to use more public funds to bolster economic activity. At the same time, he also predicted that China's once red-hot pace of economic expansion was now set rapidly to run out of steam.

“We started with China at 11 per cent growth . . . China will probably grow at 5 or 6 per cent [next year],” he said. “The possibility of a global recession is real. We realise something must be done.”

Concern over China was heightened as industrial output growth from the Asian powerhouse slowed to an annual pace of only 5.4 per cent last month. That was sharply from 8.2 per cent in October and the weakest since 1999."

This seems to be occurring.

"Turning his fire on the European Union, Mr Strauss-Kahn put himself sharply at odds with Jean-Claude Trichet, President of the European Central Bank, who yesterday urged European leaders to stick to their fiscal rule books and keep a lid on state borrowing, even as they deliver packages of economic stimulus measures.

Mr Trichet called for European countries to stick by the EU's controversial Stability and Growth Pact that limits governments' borrowing and total debt. But Mr Strauss-Kahn said that existing rule books should be scrapped, and demanded new rules to match the scale of the economic threat he saw."

I understand Trichet's caution, but believe he underestimates the seriousness of the problem.

“We are facing an unprecedented decline in output and we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures,” he said, “What was decided by Brussels . . . 1.5 per cent of GDP in the form of stimulus, is a bit below what we need.”

His comments come amid continued wrangling and sharp clashes between European leaders over how they should react to the crisis."

I'm not convinced that it's all real

"Germany has expressed substantial doubts over the wisdom of pumping huge amounts of public money into economies to try to stimulate growth and has resisted pressures to contribute more to a joint EU effort.

Peer Steinbrück, the German Finance Minister last week delivered an outspoken attack on tax and spending-led stimulus measures generally, and Britain's in particular.

“The same people who would never touch deficit spending are now tossing around billions,” he told Newsweek, in an interview. “The switch of supply-side politics all the way to a crass Keynesianism is breathtaking.” Discussing Britain's cut in value-added tax, he added: “All this will do is raise Britain's debt to a level that will take a whole generation to work off.”

He's as good an act as Yosano.

"Any acknowledgement that stable dollar adjustments are a policy priority should help prevent a dollar run. "

Free Exchange with two points about earlier posts. First, the Tim Duy point that using the Great Depression as a guide in our current crisis might be of limited use, especially where Quantitative Easing is concerned:

"And Tim Duy speculates that because of the lingering current account deficit, America's shaky dollar could be approaching a dangerous adjustment. Enough downward pressure on the dollar could begin to affect Treasury rates. And the Federal Reserve, focused like a laser beam on preventing deflation and depression, might simply work to hold those rates down by buying Treasuries and plowing still more money into the economy. And then? Well, America could begin to have trouble financing its borrowing, and could then face the need to either pursue strongly pro-cyclical fiscal policies or hyperinflationary monetary policies.

There are a lot of ifs in all of that. It would be nice to have a probability distribution for all of the different potential catastrophic outcomes facing the global economy, in order to know which lesser evil to aim for. Had we one, I suspect this concern would turn up in far fewer die rolls than the standard depression outcome. Still, it seems worth paying attention to the conflict underlying the whole thing—that America's optimal policy choices now are not quite the same as they were in the 1930s, since America's role in the global economy has changed.

Because once that conflict is understood, American leadership can be proactive. Any acknowledgement that stable dollar adjustments are a policy priority should help prevent a dollar run. And more importantly, Barack Obama's economic team should begin to consider how best to cajole large creditor nations with current account surpluses to spend heavily on stimulus and boost domestic consumption.

There's no particular reason that America has to make policy in a vacuum, just hoping that trading partners don't do anything radically destabilising. Leaders globally need to understand that they have a mutual self-interest in unwinding global imbalances while also providing coordinated stimulus. And leaders among those leaders need to lead."

I've said much the same thing, only with less expertise.

Now, about Germany and the EU Stimulus:

"Jean-Claude Trichet, head of the European Central Bank, argued today in favour of European fiscal discipline and adherence to the Stability and Growth Pact. A noble sentiment, but one that's potentially troublesome given Mr Trichet's recent signals that the ECB is ready to pause in its rate cutting, and given Germany's reluctance to pursue bold fiscal stimulus. Germany said last night that no new stimulus plans would be forthcoming until it was clear what stimulus policies Barack Obama might pursue in office. Just why isn't clear. Mr Obama's stimulus is likely to be at least $500 billion in magnitude, and it's hard to know why the structure of the plan—tax cuts or local budget grants or infrastructure investment—would influence German choices."

I suspect that the wait for President Obama's Stimulus Plan is actually aimed more at domestic politics, since I concur in finding Germany's wait puzzling. But it is true that the amount of the US Stimulus might have an impact on how necessary a coordinated stimulus plan is, and how much each nation should spend. It could simply be prudence.

" Europe’s leaders are loath to do anything that might imperil the euro and the cohesion of the eurozone. "

Tony Barber in the FT gives his version of what's happening with the European Stimulus:

"The European Union’s much-touted €200bn fiscal stimulus package is looking more and more like one of those trick cigars I remember from years ago. A trick cigar looks like a cigar. It even feels like a cigar. But when you try to smoke it, nothing happens.

In the case of the EU’s fiscal stimulus - an initiative designed to pull Europe out of its deep recession, and approved by EU leaders at last week’s summit in Brussels - one gets the distinct feeling that someone somewhere is trying to pull wool over the general public’s eyes. The €200bn is there on paper, but there is not much evidence of it in the real world.

This is explained very clearly by David Saha and Jakob von Weizsäcker in a freshly published study for the Bruegel think-tank, “Estimating the Size of the European Stimulus Packages for 2009″. They say only one country in the 15-nation eurozone is genuinely applying the classic Keynesian recipe of increased deficit spending to counter a downturn. That country is Spain.

Particularly startling is their analysis of the measures recently unveiled in Italy by Prime Minister Silvio Berlusconi’s government. Officials in Rome portrayed this as an €80bn stimulus, or roughly 5 per cent of Italian gross domestic product. What nonsense. The Bruegel economists conclude that the Italian measures announced since September add up not to a stimulus, but to the opposite - a small fiscal tightening of €0.3bn!

As it happens, there are very good reasons why it would be imprudent for Italy to embark on a spending spree right now. With a public debt higher than its annual economic output, and with financial markets acutely nervous about traditionally profligate borrowers such as the Italian state, Berlusconi and his colleagues need to show great care in navigating their way out of the recession.

As the Italian example suggests, there is rather more support in private around Europe for Germany’s well-known apprehension about the EU-wide fiscal stimulus than is admitted in public. To name just a few countries - in and outside the eurozone - that share Germany’s wariness, think of Lithuania, the Netherlands, Poland and Sweden. And, of course, the European Central Bank is sympathetic to Germany’s position, too.

The bottom line is that, whatever the severity of the recession, Europe’s leaders are loath to do anything that might imperil the euro and the cohesion of the eurozone. For them, this is the multi-national European project that matters. As far as possible, therefore, they will try to stay within the limits set by the Stability and Growth Pact, the EU’s fiscal rulebook. And this means restricting the scope of a European fiscal stimulus."

So, three problems:

1) Many countries in the EU are wary of a stimulus and borrowing more money.

2) Many countries in the EU do not want to violate the EU's Fiscal Rules, even in this crisis.

3) Many countries in the EU believe that strict adherence to previously agreed upon rules is the best way to ensure the survival of the EU.

Let me add a few:

1) Many countries in the EU believe that overspending and borrowing caused this crisis, so that can't be the answer.
2) Many countries in the EU hold the US and UK responsible for this crisis, while Germany has weathered it well. Hence, Germany is getting more credence than the US or UK.
3) Many countries in the EU are just plain fed up with the US and UK after the last eight years.

I still think that an EU Stimulus makes sense, and that Germany will come around, but I can't say that I don't understand their reasoning. Plus, turning savers into spenders isn't easy. Quite frankly, it shouldn't be.