As the global recession deepens, the Group of Seven finance ministers and central bankers met in Rome last week and agreed that stabilizing the global economy and financial markets remains their highest priority. Issuing a strong and welcome message, G7 nations reaffirmed their commitment “to act together using the full range of policy tools to support growth and employment and strengthen the financial sector.” As they said, acting together is indispensable for reversing the global economic downturn.
Assessment of the world economy by the G7 financial leaders is severe. They said “the severe downturn has already resulted in significant job losses and is expected to persist through most of 2009.” Facing this situation, G7 fiscal policies will “include the appropriate mix of spending and tax measures to stimulate domestic demand and job creation and support the most vulnerable,” and will be “front-loaded and quickly executed.” It is extremely rare for the G7 nations to agree to take simultaneous steps to increase fiscal spending to stimulate their economies.
Still, higher fiscal deficits could lead to a rise in long-term interest rates. As the G7 statement says, fiscal policy measures should “be consistent with medium-term fiscal sustainability and rely mostly on temporary measures.” The governments face the difficult task of maximizing the effectiveness of their fiscal measures while paying attention to fiscal discipline.
The G7 statement declared a commitment to avoid protectionist measures and to work toward a “quick and ambitious conclusion” of the Doha Round of the world trade liberalization talks. This declaration is timely in view of protectionist moves by several countries including Russia, China and India as well as the “Buy American” provision in the U.S. stimulus package. France and Italy have announced steps to aid enterprises on the condition that they not move production abroad. Both G7 and non-G7 nations should keep the statement’s warning in mind: Protectionism will only exacerbate the current economic downturn.
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