Strategic Panorama 2009 - 2010 - IEEE

The global recession and its impact on international economic relations
Although it is impossible to determine with accuracy the optimum time
for withdrawing the stimuli, there is a certain amount of agreement on the
need to maintain them at least until the middle of 2010 (or until there is
evidence that recovery is firmly underway). There also appears to be consensus
on the need to withdraw fiscal stimulus before monetary stimulus
(just as fiscal stimulus was implemented after it became clear that monetary
stimulus was insufficient to reactivate the economy) (2). Therefore, it is
possible that the countries with the highest growth rates will adopt counteractive
budgets in 2011 (3). However, it should be borne in mind that
fiscal policy poses the problem of a time lag that is difficult to determine
between the moment the government decides to withdraw spending and
the moment when the contraction hits the real economy. Therefore, if the
delay is too long, it could cause inflationary pressure to force the central
bank to raise interest rates before public expenditure begins to decrease.
But despite these question marks hovering over when to withdraw
discretionary fiscal stimulus and how to calculate the size of the time lag,
the alternative—to begin with monetary contraction—has even greater
problems. The main one is that if interest rates were raised, the cost of
financing for businesses and families would increase, hampering recovery.
Furthermore, higher interest rates would mean a greater cost of public
debt, making it more difficult to put public accounts in order.
It therefore seems that the combination of a contractive fiscal policy
and an expansive monetary policy is better for economic growth than a
situation where contraction comes from the monetary side. A lax monetary
policy will thus be able to carry on stimulating investment projects once
the easing of discretionary public spending has taken place, provided that
inflationary pressure allows this and the financial system is functioning
relatively normally.
Deficit, debt and future growth
Even assuming that the authorities are capable of designing effective
exit strategies that are relatively well coordinated internationally and that
there will be a return to growth, this crisis has left a gaping hole in public
coffers that will have to be closed. As charts 3 and 4 show, in 2010 all
(2) For a more detailed explanation see Clara Crespo «Estrategias de salida tras la cumbre
del G-20». Analysis 139/2009 of the Real Instituto Elcano
(3) At any rate no government wishes to repeat the mistake made by the Roosevelt
Administration in 1937 when, believing that the Great Depression was over, it approved a
tax increase that again crippled growth until the beginning of the Second World War.
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