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.