The U.S. Treasury’s top international official said that strengthening European demand is “the most important immediate imperative” for reviving global growth.
Lael Brainard, the Treasury’s undersecretary for international affairs, also said that China needs to increase flexibility in its exchange rate system, while the world recovery shouldn’t be overly dependent on U.S. demand.
“Domestic demand in the euro area is now lower than at the low point of the global crisis in 2009 in real terms,” Brainard said in the text of a speech delivered to the Council on Foreign Relations in New York. “All of the recovery in European output since that time has come from net exports. That is not sustainable for a region that accounts for almost 20 percent of the world economy.”
The euro-area economy shrank more than economists forecast in the three months through March, a report said yesterday, extending its recession to a record sixth quarter and increasing pressure on the currency bloc’s leaders to spur growth. Gross domestic product in the 17-nation euro zone fell 0.2 percent after a 0.6 percent decline in the previous quarter, the European Union’s statistics office in Luxembourg said.
“Restoring financial stability, while critical, is just the first step for the economy to heal,” Brainard said, adding that Europe must now turn to stimulating demand and employment.
Countries should be flexible as they seek to meet budget targets, and nations should move toward “unclogging” credit in southern Europe, among other steps, Brainard said during a question-and-answer session after the speech.
“We’ve seen significant structural reforms that, over time, will bear fruit,” she said. “The difficulty, of course, is right now what is needed is demand.”
The idea of moving away from cost-saving may be gaining momentum in Europe. French Finance Minister Pierre Moscovici declared earlier this month that the era of government budget cutting was over.
“We’re witnessing the end of the dogma of austerity,” Moscovici said on May 5 on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”
Brainard also focused in her speech on tightly managed exchange-rate regimes, which she said “put an undue burden of adjustment on those emerging economies with market exchange rates.” Such tightly managed systems also “contribute to the weakness of demand in the advanced economies,” she said.
It is “imperative that China take additional measures to increase the flexibility of its exchange rate regime,” Brainard said, and it is “critical” for Japan to expand domestic demand.
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