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The world may be coming together on what needs to be done to pull the economy out of crisis. There is much common ground, if not a consensus, in many areas. This is not a sufficient condition for eventual recovery. But it is a first and necessary one.
Take financial regulation. The de Larosière report, the UK’s Turner review and early drafts of the G20 communiqué suggest much the same. In the future, the financial sector will be safer and duller. Banks will probably be smaller, regulation tougher and required capital higher. Lower profitability will take care of the bonus issue by itself. Whether such changes would be “good” or “bad” is a separate question. The important point is that international agreement is relatively uniform. As a result, no country’s banking system will enjoy advantages over another.
The same is true of monetary policy. The world’s major central banks have all cut interest rates to zero, or close. Many are now engaged in quantitative easing. This is risky if done alone as it can weaken the currency and give rise to criticism of “beggar-thy-neighbour” devaluations. But if everyone does it, the world can gain from the extra monetary boost.
Finally, there is fiscal policy. Countries are opening their wallets. Even Germany’s stimulus is only slightly smaller than the US’s as a percentage of output. Europe’s biggest tightwad is, in fact, France. And as even the International Monetary Fund now believes that countries should spend more – and the IMF’s director is a Frenchman – Paris may well come round too.
There is still a long haul ahead. There will be setbacks, and the world is headed for a stiff recession, at least. Whatever happens, the required deleveraging will take years. But there are also grounds for hope.
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