The International Monetary Fund (IMF) has released a report on the global economy that tends to agree with the assessments of several other financial institutions by forecasting that the global economy will contract as much as a full percentage point this year. The U.S. economy, the world's largest, is expected to shrink by 2.6 percent, the IMF report said, while the combined economies of the eurozone members of the European Union will contract even more, by 3.2 percent.
Yet emerging countries, such as China, India, and Brazil are expected to rise by about the same rate. This means the poor performance in the industrialized world will drag down the modest success of its less-industrialized neighbors. RFE/RL correspondent Andrew F. Tully interviewed Allan Meltzer, a professor of economics at Carnegie-Mellon University, about what it all means.
RFE/RL: Professor Meltzer, the IMF report is only the most recent to forecast a decline in the global economy. With so many organizations agreeing on this point, is a decline certain? Is this news?
Allan Meltzer: It's not really news. There are some bright spots in the world economy. India is not doing too badly, and China is doing moderately well, but most of the world economy is declining, and probably, on average, the whole economy will decline this year.
RFE/RL: On April 2, U.S. President Barack Obama will attend a summit of the Group of 20 leading industrialized and emerging economies to work with Europe on what many say must be a unified strategy to fight the global recession. But Obama says the best strategy is stimulus spending, while German Chancellor Angela Merkel is pressing for international regulatory standards for banks. Can they work out their differences?
Meltzer: No. They'll issue some pleasant words, but the Germans aren't going to go anywhere near the stimulus program that the U.S. has set out, and the U.S. is unlikely to go along with allowing the Europeans to have regulatory authority over what are mainly American banks.
RFE/RL: The IMF report says the United States, Europe, and Japan will see economic contraction this year, but, as you noted, India and China -- as well as Brazil, I think -- will show modest expansion. So it's the big industrial giants that are dragging down the overall world economy?
Meltzer: Yes. The world economy is interrelated, and the United States is still the biggest single entity, and the European Union is another very large entity. So when those economies are weak, they are importing much less, and that hurts the countries which depend upon exports. So of course [exporting countries] feel the pain. But of course in China and in India, they can stimulate their own economies through domestic spending, which is what they're doing. And that's true in Brazil. So there [are] things that they can do and they're doing them. But they are feeling [the] problem of not being able to export as much as they would like and as much as they did in the past.
RFE/RL: The IMF joins other critics in blaming the United States for not having a clear strategy for dealing with banks. U.S. Treasury Secretary Timothy Geithner says he wants to wait for a report on the exact financial status of American banks before he decides on what he wants to do. What do you think?
Meltzer: I think the basis of bank problems is that governments follow a policy -- certainly in the United States, but elsewhere also -- of "too big to fail." They don't let large banks fail. So they shouldn't be surprised that large banks take on excessive risk. And unless they stop that, they're not really going to do much, and they don't even talk about doing that. One of the reasons that the Treasury has so much difficulty coming up with a banking plan is it's not willing to do something which would cause them to recognize that some of the banks are insolvent.
RFE/RL: Speaking of blame, the IMF blames the Europeans for having such modest stimulus plans. Should Europe increase the size of its stimulus?
Meltzer: They have adopted stimulus plans, they just aren't going as wild as the United States has been. We're going to have a big problem in the future. We're putting out [a] trillion dollars worth of debt. When most other countries do that, they finance a great part of it at home. We don't save enough, so we're going to have to depend upon the rest of the world to save it. That means we're going to have to attract capital from other countries -- China, India, Japan -- and they're busy with their own problems. So interest rates are going to rise, the dollar is going to depreciate -- that's a recipe for inflation.
RFE/RL: Many economists say that seven decades ago, protectionism is what turned a recession into a worldwide depression. Today, Mexico is accusing the United States of taking a protectionist stance and the Czech Republic is throwing the same accusation at France. Are we seeing a recurrence of dangerous protectionism?
Meltzer: So far there [has] been protectionist actions in many places, but they're relatively mild. They're not of the kind that we had in 1929. The tariffs raised duties here on foreign imports heavily and were met almost immediately by retaliation in many other countries. So all countries were going in a more protectionist direction. So far [in the current recession], they have not gone far [in protectionism], and there's a great deal of support for the idea that we don't want to go in a protectionist direction, we don't want to repeat the mistakes of 1929 to '33. But pressures domestically from labor unions and others -- those pressures are real and they have political influence.
Yet emerging countries, such as China, India, and Brazil are expected to rise by about the same rate. This means the poor performance in the industrialized world will drag down the modest success of its less-industrialized neighbors. RFE/RL correspondent Andrew F. Tully interviewed Allan Meltzer, a professor of economics at Carnegie-Mellon University, about what it all means.
RFE/RL: Professor Meltzer, the IMF report is only the most recent to forecast a decline in the global economy. With so many organizations agreeing on this point, is a decline certain? Is this news?
Allan Meltzer: It's not really news. There are some bright spots in the world economy. India is not doing too badly, and China is doing moderately well, but most of the world economy is declining, and probably, on average, the whole economy will decline this year.
RFE/RL: On April 2, U.S. President Barack Obama will attend a summit of the Group of 20 leading industrialized and emerging economies to work with Europe on what many say must be a unified strategy to fight the global recession. But Obama says the best strategy is stimulus spending, while German Chancellor Angela Merkel is pressing for international regulatory standards for banks. Can they work out their differences?
Meltzer: No. They'll issue some pleasant words, but the Germans aren't going to go anywhere near the stimulus program that the U.S. has set out, and the U.S. is unlikely to go along with allowing the Europeans to have regulatory authority over what are mainly American banks.
RFE/RL: The IMF report says the United States, Europe, and Japan will see economic contraction this year, but, as you noted, India and China -- as well as Brazil, I think -- will show modest expansion. So it's the big industrial giants that are dragging down the overall world economy?
Meltzer: Yes. The world economy is interrelated, and the United States is still the biggest single entity, and the European Union is another very large entity. So when those economies are weak, they are importing much less, and that hurts the countries which depend upon exports. So of course [exporting countries] feel the pain. But of course in China and in India, they can stimulate their own economies through domestic spending, which is what they're doing. And that's true in Brazil. So there [are] things that they can do and they're doing them. But they are feeling [the] problem of not being able to export as much as they would like and as much as they did in the past.
RFE/RL: The IMF joins other critics in blaming the United States for not having a clear strategy for dealing with banks. U.S. Treasury Secretary Timothy Geithner says he wants to wait for a report on the exact financial status of American banks before he decides on what he wants to do. What do you think?
Meltzer: I think the basis of bank problems is that governments follow a policy -- certainly in the United States, but elsewhere also -- of "too big to fail." They don't let large banks fail. So they shouldn't be surprised that large banks take on excessive risk. And unless they stop that, they're not really going to do much, and they don't even talk about doing that. One of the reasons that the Treasury has so much difficulty coming up with a banking plan is it's not willing to do something which would cause them to recognize that some of the banks are insolvent.
RFE/RL: Speaking of blame, the IMF blames the Europeans for having such modest stimulus plans. Should Europe increase the size of its stimulus?
Meltzer: They have adopted stimulus plans, they just aren't going as wild as the United States has been. We're going to have a big problem in the future. We're putting out [a] trillion dollars worth of debt. When most other countries do that, they finance a great part of it at home. We don't save enough, so we're going to have to depend upon the rest of the world to save it. That means we're going to have to attract capital from other countries -- China, India, Japan -- and they're busy with their own problems. So interest rates are going to rise, the dollar is going to depreciate -- that's a recipe for inflation.
RFE/RL: Many economists say that seven decades ago, protectionism is what turned a recession into a worldwide depression. Today, Mexico is accusing the United States of taking a protectionist stance and the Czech Republic is throwing the same accusation at France. Are we seeing a recurrence of dangerous protectionism?
Meltzer: So far there [has] been protectionist actions in many places, but they're relatively mild. They're not of the kind that we had in 1929. The tariffs raised duties here on foreign imports heavily and were met almost immediately by retaliation in many other countries. So all countries were going in a more protectionist direction. So far [in the current recession], they have not gone far [in protectionism], and there's a great deal of support for the idea that we don't want to go in a protectionist direction, we don't want to repeat the mistakes of 1929 to '33. But pressures domestically from labor unions and others -- those pressures are real and they have political influence.
