Perspectives from Around the World
Deputy Managing Director, International Monetary Fund
For SHINOHARA Naoyuki's full bio,
"Global Challenges, Global Solutions." This is the slogan that the International Monetary Fund (IMF) has been advocating in recent years including at its annual meetings. The financial crises of Asia and Latin America in the 1990s showed how an economic bubble or policy failure in one country spreads to nearby countries and how important it is to maintain the stability of the financial system. The latest financial crisis since 2007 was triggered by the burst of the bubble in the United States and Europe and has had a devastating impact on the entire global economy, which turned out to be far greater than what could have been imagined. This reminded us of just how rapidly economies and financial markets all around the world are being globally integrated.
Global challenges require global solutions. Although this may sound quite natural, have we really learned the lessons from the experience of past financial crises and addressed the latest crisis with a global response? I find it to be highly questionable. In what follows, I would like to discuss some of the risks that exist in the global economy.
The first post-crisis risk which I would like to cite is a risk to financial stability that stems from insufficient reform of the financial regulatory and supervisory system. Although there have been some significant steps forward, glacial progress toward a banking union gives us enough reason to be skeptical as to whether the member economies of the European Union (EU) are truly united in tackling the crisis, even without pointing to the ambiguity of the ongoing debate over backstops for failing banks.
In the United States, the Volcker Rule finally has been set for implementation after prolonged wrangling between the federal regulatory authorities and banks. The rule, or the Dodd-Frank Wall Street Reform and Consumer Protection Act, is an ambitious attempt designed to address vulnerability revealed by the collapse of Lehman Brothers. However, this will lead to greater regulatory differences across countries. When what is allowed in one country is not in another in the presence of a globally integrated market, the resulting effect is an increase in regulatory arbitrage and other unintended consequences. Essentially, banks operating internationally must be regulated by international rules.
The introduction and enhancement of various regulations for implementing the Basel III rules are far behind the initial schedule. The discussions on a resolution mechanism for failing global banks are making little headway.
Strengthening the oversight of shadow banking was put on the agenda for the Group of 20 (G20) economies in the post-Lehman period and is supposed to remain as a high priority. But again, little progress has been made to date. The unruly expansion of shadow banking was the primary cause of the Lehman failure. Nevertheless, shadow banking has been on the rise again after the crisis and is continuing to grow. The case of China is best-known, but the same trend is observed in the United States as well as in other emerging economies.
As the second post-crisis risk, let me cite the risk of the long-term low growth of the world economy. This, if materialized, would work to aggravate the problems of widening income inequality and youth joblessness in each country. Do we have a global solution to prevent this risk?
Although we can be relatively optimistic about the recovery of the U.S. economy, it will take a while before the output gap is closed. Meanwhile, Europe will continue to face the risk of deflation. In many European countries, the problem of debt overhang in the corporate and household sectors is far from over, and banks are bound to consolidate their balance sheets. Addressing fiscal deficits will take time. The link between wages and prices is relatively tight in Europe, and what we observe today is a downward trend in inflation rates. The medium-term growth rate for core eurozone countries will be 1% or below.
Emerging economies have experienced a slowdown in growth in recent years. The slowdown is caused by a complex mix of cyclical and structural factors with backgrounds varying from one country to another. In the case of China, the current, investment-dependent economic structure must be changed, and there is no hope for achieving double-digit growth as the country had experienced until several years ago. When the United States began discussing an exit from its unconventional monetary policy in May 2013, financial markets in some emerging economies--those that are fraught with fiscal and/or balance-of-payment deficits--were jolted by the mere prospect of tapering. As central banks around the world gradually unwind their ultra-easy monetary policy and return to normalcy, it will become more difficult for emerging economies to take advantage of cheap funds from abroad, and they will be required to exercise greater discipline in their policy management.
The third and last post-crisis risk is the possibility of increasing market volatility as a result of developed countries exiting from their unconventional monetary policy. Unconventional monetary policy measures were quite effective initially, restoring stability to the financial markets. However, opinions are divided over the extent to which those measures will directly impact economic recovery. Meanwhile, massive liquidity must be withdrawn sooner or later, given its significant adverse effects such as reducing funds' sensitivity to risk and amounting to central bank financing of fiscal deficits and hence undermining fiscal discipline. When the U.S. Federal Reserve (Fed) took its first step to exit its extraordinary stimulus in December 2013, the markets remained relatively calm partly owing to the Fed's tactful dialogue. However, changing expectations on an exit strategy will continue to have unexpected impacts on various segments of the global financial markets.
January 1, 2014
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January 1, 2014［Perspectives from Around the World］