Angel Gurria, the Secretary General of the OECD, was first off the mark with pre-G20 summit briefings in Los Cabos. He gave a press conference last night against a backdrop of heightened concerns about rising unemployment and, he warned, rising inequality—particularly in countries struggling with the euro crisis and in the grips of fiscal austerity. The vote in Greece today gives his concerns a concrete focal point.
Given his comments, you might think that he is critical of the status quo approach to the global malaise or has a different policy prescription for what ails the euro zone. If he is, or if he does, he didn't share it at the press conference. While he seemed genuinely worried about the prospects for the global economy and the potential threats that continued poor prospects pose to the system of open international trade and payments that has been erected over the past six decades, the message I took from the Secretary General's comments is, in effect, "grin and bear it."
This is not wholly unexpected. As long as continued membership in the euro zone is the over-arching objective, members struggling with high debts have very little alternative but to persevere on the path of fiscal austerity. The Secretary General was absolutely correct to point out that countries, such as Greece, have no choice.
But the key point here is that the citizens of these countries do in fact have a choice: they can either cut the Gordian knot and leave the euro zone, or they can plead poverty and suspend payments on its debts. Make no mistake: either of these would be hugely disruptive; I am not necessarily advocating their adoption.
It would be patently unrealistic of me to expect the OECD to make these points and churlish of me to criticize the Secretary General for not doing so in an opening public press conference.Yet, I think the OECD and the Secretary General could play a very constructive role in "speaking truth to power." Most important in this respect is the need to articulate a clear analysis of the nature of the current crisis.
In the absence of the right diagnosis, the wrong prescription will be applied; the bleaker the prognosis.
In this regard, as others have pointed out, the euro zone is in the throes a balance of payments (BoP) problem. To be sure, the fiscal profligacy (Greece) or financial sector excesses (Ireland) that preceded the crisis are the twin sources of the problem. But the underlying analytics of today's malaise are rooted in the basic balance of payments problem of adjustment—it is, in a sense, akin to the balance of payments problems experienced by developing countries under the Bretton Woods system in, say, the 1960s.
As was the case in the Bretton Woods era, policy makers are conflicted—the more they try to meet their "external" commitments (and service their debts), the further they move from their internal objective of maintaining full employment. In the 1960s, the International Monetary Fund (IMF) was able to assist its members in dealing with crises by providing the financing needed to smooth over the time the adjustment needed to close BoP gaps. Today, there is, of course, a huge complication: the euro crisis is much, much bigger, with the potential to impart a serious blow to the global economy. This reflects the fact that, in contrast to the BoP crises of the Bretton Woods era, capital account liberalization has increased the size of cross-border capital flows, while the absence of a better framework for the timely, orderly restructuring of sovereign debt has left the IMF less able to assist its members strike a judicious balance between financing and adjustment. These are the basic challenges that the euro zone will have to address.
The simple fact is that the longer that the status quo continues with no prospects of improvement, the greater the likelihood that the members of the "periphery" will be driven to those corner solutions. The elections in Greece today will give a good sounding of how close we are to this outcome.
