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Challenges lie ahead in revival of global economy
Publication Date : 19-09-2012
September 15 marked the fourth anniversary of the so-called Lehman shock, but the global economy remains mired in the doldrums. Will additional measures recently decided by the US and European central banks open the door to an economic recovery?
The US Federal Reserve Board has introduced a third round of quantitative easing, or QE3, to inject a massive amount of funds into financial markets. This follows the first and second rounds in 2008 and 2010, respectively. Under QE3, the Fed will purchase US$40 billion of mortgage-backed securities per month.
The Fed also decided to extend its virtually zero-interest rate policy, which it previously planned to maintain until late 2014, until mid-2015.
The Fed took this bold step--dubbed by some as a trump card--with the aim of buoying the economy to help increase employment. A strong sense of crisis apparently prompted the Fed to take this step.
US in a tight spot
The deterioration in US economic indicators has been striking in recent months. The growth rate of the real gross domestic product fell to an annualised 1.7 per cent in the April-June quarter. The unemployment rate remains stubbornly high at the 8 per cent level.
The US economy briefly picked up due to the all-out implementation of fiscal and monetary policies after the Lehman shock. However, the employment situation remains miserable and the economy has yet to get on a recovery track.
One difference from four years ago is that the US government is saddled with an immense budget deficit, which makes it very difficult to launch fiscal policies now. The United States has no choice but to depend on a monetary policy, but it is uncertain how effective this will be in improving the jobs situation. The US government will face difficult challenges in steering the economy.
Even more disconcerting than the economic situation in the United States is the European sovereign debt crisis, which shows no sign of drawing to a close.
The European Central Bank has finally decided to purchase unlimited amounts of government bonds of Spain and other countries plagued by credit uncertainty due to the deterioration in their state finances.
Eurozone's need for speed
This is one step toward containing the crisis, but Europe, which has been too tardy in dealing with the problem, needs to act speedily.
We urge eurozone nations to quickly and fully activate the European Stability Mechanism, which will buy government bonds of countries affected by credit uneasiness in cooperation with the ECB. Spain should quickly seek assistance, and Germany and France must stand united with their support.
However, assistance from the ECB and the ESM is a mere stopgap measure. It is indispensable that nations such as Spain and Greece, the epicenter of the European financial crisis, embark on economic structural reform such as drastic fiscal reconstruction.
There also has been much hand-wringing over the rapid slowdowns in emerging economies, including China and Brazil, that had served as driving forces of the global economy after the Lehman shock. The superstrong yen is damaging Japan's export industries and the country's economic recovery remains at a standstill. The government must be vigilant against further appreciation of the yen.
The revival of the global economy has only been half completed. Developed and emerging nations must do more to strengthen cooperation to finish the job.