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Jean Pisani-Ferry: the Decisions that suppresses the next recession must be taken now

The global expansion has reached its peak, warns the OECD in its latest forecast, the future may become weaker. The party, however, is not over yet: The global growth is expected to continue in 2019 and 2020, though at a slower pace. But forecasters are known to be poor at detecting the macro-economic turning points, and the road ahead of us is difficult to read.

if the potential obstacle: more aggressive monetary policy tightening, particularly in the united states, further escalation of protectionism, an economic slowdown in China that hits harder than expected and a return of tensions within the eurozone, triggered by concerns about the Italian economy's future. These factors – or some of them – would be able to reinforce a slowdown that has already begun.

Trumpadministrationens policyblandning of extensive tax cuts and increased spending – a financial stimulus package as far-reaching as that which was introduced in 2009 to stave off a looming depression – is, under such circumstances, completely abusive, from an economic point of view. The U.S. central bank has only two options: raise interest rates more aggressively to offset a feltajmad stimulation, or surrender.

the global sensitivity to the US's räntecykel would such an irresponsible ”chicken-race” between the U.S. financial and monetary policy institutions increase the risk of instability in the rest of the world.

A global recession would be very premature for countries whose post-crisis recovery has been delayed, weak, or both. Greece, whose growth started to come back first, 2017, and whose unemployment rate remains close to 20 per cent, is an extreme case. But it is not alone. In Italy, gdp per capita is not higher than it was in the middle of the 1990s. In Spain, France, south Korea and elsewhere, unemployment is still significantly higher than before the crisis.

end of the world, we have Germany, whose labour market is in far better condition than it was in 2007. Full employment prevails in the western provinces, and the economic growth is based increasingly on immigration: 2017 amounted to the net inflow – no longer refugees, but for the most part the other europeans – not less than 400 000 people. Japan, the Uk and Poland have also seen a recovery with job growth. Citizens complain of income, inequality or rising house prices but not on labour shortages.

ten years ago, fell almost all the advanced economies down the precipice at the same time. Nowadays they are neither structurally or cyclically in tune with each other. It is a matter of concern, because the global economy, moderation comes at a time of increasing political fragility of the states. Trust in governments and policymaking institutions is still – quite understandably – very low. Collective economic mismanagement would only degrade it further and fomenting the economic nationalism that already are on the rise.

Policymakarnas task is to manage risks, and these are in the day not of the usual kind.

the Agenda starts at home. In many places where the imbalance is, measures are required to strengthen the economic potential and lower the thresholds to the labour market. In spite of 9% unemployment and the president of Emmanuel Macrons reforms report employers in France, the lack of skilled labor. This requires major training initiatives, support to the mobility, the incentives to accept job offers and to protected sectors are opened.

this is All done actually. But in Italy, the ruling coalition launched a financial stimulus at the same time as proposing measures that will reduce labour force participation. Among these are the repeal of the 2011 pension reform and the creation of a ”guaranteed minimum income” which, if constructed or carried out badly, will lead to even more people to become inactive.

n is to achieve the right balance in terms of risks. A longer period of time, there has been a debate between the monetary hawks – which warns that the central banks ' purchase of government securities and interest rates around zero, stoking financial instability and inflation risks – and the pigeons, which, above all, the fear of deflation. Both risks are there, but yet it is more for the latter than for the former.

with regard to real estate can be managed via the regulations. As regards inflation so have the predictions time and time again come to naught. Wages have only slowly responded to declining unemployment. There is a well-founded fear that they would be able to begin to rise abruptly, but after so many years of missed inflation targets, this is a risk worth taking. The collective price of a temporarily high inflation is overshadowed by the price for a premature recession leading to permanent wounds and a political backlash against economic orthodoxy.

n, international coordination, by a wide margin the most difficult to accomplish, especially within the eurozone, where the european central bank is pushing the same policies for economies that are different. Standardreceptet would be to allow the ECB to focus on the average level of inflation and has to rely on national fiscal policies to fine-tune the macroeconomic situation.

But because of the large liabilities or residual deficit is the countries need additional growth also in those who lack the financial space. Neither Greece or Italy or even Spain or France currently have the option to the functioning of the financial stimulus.

because of the lack of joint responsibility for liabilities (such as the recently concluded franco-German agreement on a mini-eurozonbudget is not supposed to fix), this is another reason why the ECB should not shy away from bold decisions. Then would the governments of the countries at risk of overheating need to take on the task of using fiscal means to cool down the economy – and in countries which still have growth problems would need to unlock the economic potential.

t if reason to doubt that this can become a reality. But policymakarnas task is to manage risks, and these are in the day not of the usual kind. What is at stake is the global system's resilience. Cracks have appeared in spite of a favorable context. You should not let them move in the fractures.

Translation: Mats Dannewitz Linder

Copyright: Project Syndicate

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