Facing reality.

Photographer: Japan Pool/AFP/Getty Images

Central Banks Can't Go It Alone Anymore

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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Whether through signals from the Group of Seven meeting this week or in the outcome of the latest round of European negotiations on Greece, officials of advanced countries increasingly are acknowledging that the problems facing their economies require a new response to take over from the overlong use of narrow short-term tools.

This recognition has been too long in the making and, judging from the regrettable lack of credible and detailed action plans, still needs time to be translated into progress on the ground.

Secular Stagnation

Before the G-7 meeting in Japan, several member countries indicated they understood that their individual and collective policy stances needed to evolve. Germany warned against continued over-reliance on central banks, simultaneously stressing the need for structural reforms. Canada and Japan urged a more aggressive and imaginative use of fiscal policy. And the U.S. warned Japan to resist the temptation to intervene to depreciate the yen.

Earlier this week, Greece’s European partners concluded that they needed a greater emphasis on debt relief for that beleaguered economy. In a conference call with reporters on Wednesday, an International Monetary Fund official, who spoke on the condition of anonymity, said there is there was agreement among all stakeholders that Greece's debt was "highly unsustainable" and needed relief. In addition, the official said the parties "accept the methodology that should be used to calibrate the necessary debt relief. They accept the objectives in terms of the gross financing need in the near term and in the long run. They even accept the time periods, a very long time period, over which this debt has to be met through 2060."

These notable developments reflect an important evolution in mindsets, which are shifting more decisively toward looking at structural and secular conditions, and away from an excessive emphasis on cyclical considerations. This shift is driven by three developments: recurring disappointing economic growth despite extraordinary monetary policy stimulus and, in the case of Greece, eye-popping bailout packages; concern that the benefits of unconventional central bank involvement are being offset by a mounting risk of collateral damage and unintended consequences; and recognition that the political context is becoming more complicated as anti-establishment movements gain momentum amid growing popular mistrust of “elites” both in government and the private sector.

Such thinking should, one would hope, lead to the implementation of pro-growth structural reforms, tax reform in conjunction with lessened fiscal austerity; debt relief for segments with crushing debt overhangs; and effective global policy coordination.

Nonetheless, the translation of greater collective awareness into credible actions remains frustratingly patchy.

Take the case of Greece. Despite the overdue acknowledgement of reality by European creditors -- that debt relief is a necessary (though not sufficient) condition for Greece to have any realistic chance of restoring durable economic and financial viability -- this recognition hasn't been turned into clear action. "Fundamentally, we need to be assured that the universe of measures that Europe –is willing to commit to is consistent with what we think is needed to produce debt relief," said the IMF official who described the negotiations Wednesday. "We do not yet have that."

As a result, the fund is unwilling to back with loans the compromise understanding on Greece reached this week. Meanwhile, it is unlikely that the G-7 will implement a much different policy stance once officials return to their national capitals. As a result, the crucial handoff from reassuring words to effective measures on the ground will once again fail to materialize.

Yet greater awareness is a critical ingredient of durable mindset adaptations and related course corrections, so there is hope that the advanced economies are getting closer to putting in action a much-needed comprehensive policy response. So if not this time, maybe next time. Still, time is not on their side.

A troubling aspect of structural impediments to growth is that the longer they remain unaddressed, the deeper they become embedded in the system. Today’s growth shortfalls become harder to reclaim even as tomorrow’s growth potential is undermined. That, in turn, erodes the potency of any given policy response.

These unsettling economic consequences are amplified by fluid political conditions. Anti-establishment movements are benefiting from the recent history of insufficient growth whose limited benefits have accrued to a small (and already well-off) segment of the population. As the system awaits policy actions, politics is likely to further erode support for established political parties and simultaneously reduce the potential for constructive bipartisan policy making. Meanwhile, the alternative -- a radical shift to the implementation of the more extreme policies advocated by anti-establishment movements -- is likely to be contained by the checks and balances in the system. Indeed, the experience of the Syriza party in Greece provides a vivid illustration of the constraining effect of these institutional guardrails.

Advanced economies should be congratulated for their willingness to incorporate a larger dose of structural and secular considerations into their economic deliberations. But every quarter they wait to enact credible and comprehensive measures adds to the difficulty of removing the impediments to inclusive growth and makes the political context even more complicated.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net