Independent article on the need for a global ‘new deal’

Three years after the Wall Street crash of 1929, and with the world still mired in recession, the US elected a president whose determination to forge a “new deal” rescued America from depression and set an example to the world. Three years on from the global financial crisis of 2008, and with the developed world again mired in economic stagnation, that same vision and “new deal” determination is badly needed across the world.

You either learn the lessons of history or are condemned to repeat its mistakes. And to be fair, in the face of indebted banks and cautious consumers and companies, central banks have striven not to fall in that 1930s trap – providing liquidity to keep credit flowing in the face of very low interest rates. But so far our politics has not responded in kind. Yes, the worst of 1930s-style protectionism has been avoided. But on fiscal policy, where the world needs Roosevelt-style clarity and purpose, deflationary policies continue to undermine jobs and growth.

America, the eurozone and Britain: three currencies stuck with stagnating growth, high unemployment and high deficits; three very different governing “coalitions” facing political deadlock when a change of course is desperately needed.

First, in America we see the most familiar and easy to understand political deadlock. President Obama has made the case for a balanced plan to support jobs and growth alongside medium-term deficit reduction. But his clarity of purpose was badly undermined by Republican political brinkmanship over the debt ceiling this summer.

And this political deadlock is not only a problem for America. Because when the world needs a united US government to tour the world banging the drum for global growth, the President is instead touring US states defusing Republican opposition to his own jobs plan.

Europe, by contrast, has been facing a new and unfamiliar crisis – a political deadlock not within one government but between nation states locked together in the euro. If the euro is to survive, markets need to know and believe that in return for a decisive plan to restore growth and a balanced plan for tough action on deficits, the ECB will, with political support, stand behind the sovereign debts of member states. While this is in doubt, the whole project will remain in doubt – undermining market confidence and growth and leaving banks vulnerable. There are only so many times we can have summits that present a united front, promise a comprehensive solution but disappoint on the detail.

Britain, meanwhile, is facing a very different political crisis to America and the eurozone. Britain’s problem is not the absence of agreement but the nature and rigidity of the agreement forged to bring a coalition together. When no party won an overall majority last year, the cornerstone of the new Coalition Government’s agreement was a rapid deficit reduction plan. The Coalition said that cutting spending and raising taxes further and faster than any other major economy would boost confidence, growth and jobs. The opposite has happened: confidence has slumped, our economy has flatlined for a year and unemployment is at a 17-year high.

Austerity is not working in Britain. But the UK’s peculiarly British problem is that the Coalition is locked into a rigid agreement on the deficit and fears that any change of course might undermine the political foundations upon which it was built – the very reason it came together in the first place.

This can’t go on. The world badly needs a change of course at the forthcoming G20 summit. We need a new deal based on the understanding that collective austerity risks catastrophe and that, as the IMF’s Christine Lagarde has rightly warned, “slamming on the brakes too quickly will hurt the recovery and worsen job prospects”. A new deal that includes credible but steadier, more balanced deficit reduction plans to support the growth and jobs the world needs now – all of which should be agreed when the G20 meets in Cannes next week.

If we are to avoid repeating the mistakes of that 1930s lost decade, then the world badly needs a “new deal” – and soon. But from where will the leadership come? And how long will we have to wait?

This article is based on a speech given at the Buttonwood Gathering in New York last night.

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Posted October 27th, 2011 by Ed