Independent actions by developed and emerging countries have failed to maximize global economic growth, Bank of Canada Deputy Governor John Murray said, making reference to a Beatles song to suggest a way forward.
“A little help from your friends might be all you have left,” Murray said. “Second-best strategies for staying out of trouble, such as keeping your own house in order, may now have to give way to third-best coordination strategies.”
Major economies are struggling to revive growth after cutting interest rates close to zero and incurring budget deficits, Murray, 63, said in a speech last night in Plattsburgh, New York. Emerging economies are also unwilling to abandon policies that have helped them in the past, such as keeping inflexible exchange rates, he said.
Canada helped lead talks among Group of 20 countries that led to joint commitments for adopting more-flexible currencies and cutting deficits, moves that Murray said are the best course for promoting growth. Currency policy is the area where there has been the least progress, he said.
“Regrettably, it is movement on the exchange-rate front and the correction of external imbalances that are proceeding at the most glacial pace,” he said. “A way must be found to break this logjam to everyone’s advantage.”
Europe’s debt crisis and “strong, sustainable growth” worldwide are the two biggest challenges, and they are related, he said.
Expand Global Pie
“Fiscal and banking problems are not going to be solved by deleveraging alone,” he said. “It will also be necessary to expand the size of the global pie in a more evenly distributed manner if long-run stability is to be achieved.”
The Ottawa-based central bank has done a simulation that shows the cost of failing to implement reforms, Murray said. Without China adopting a flexible exchange rate and without the U.S., Europe and Japan addressing their budget deficits, world gross domestic product could be 8 percent lower by 2017, a loss of $7 trillion, he said, adding “it could well be much worse.”
Murray did not make any reference to the outlook for Canada’s economy or monetary policy.