Monthly Archives: April 2013

By Eswar Prasad and Karim Foda

The global economic recovery remains stuck below takeoff speed, unable to achieve liftoff and facing the risk of stalling. Half-hearted fiscal austerity measures are proving to be a drag on growth and doing little to rebuild investor and consumer confidence.

Monetary policy continues to shoulder the burden of limiting downside risks and has kept financial markets buoyant even in the face of weak growth prospects.

The Brookings-FT Tiger index shows growth momentum remains weak in nearly all major advanced and emerging market economies. The best that can be said about the weak pace of economic activity is that it has bottomed out in some key economies. However, prospects of a strong cyclical pickup in growth are likely to be hampered by continued policy uncertainty and concerns about further financial market turbulence, with the simmering eurozone debt crisis once again coming close to boiling over.

 

By Lenos Trigeorgis

EU politicians have been locked in myopic and often self-defeating policies regarding bailout of troubled eurozone countries. They have insisted, in principle correctly, that troubled countries bring their finances to a sustainable path. But the austerity measures used are killing the growth prospects of these countries and damaging their ability to repay the lenders. The less able-to-pay the borrowers become, the tougher the repayment terms imposed, leading to a vicious cycle of further deterioration.

An alternative would be to tie the coupon paid on rescue loans to the growth of the country’s economy. When the economy is in recession, the debt interest burden will be lower, helping the country to boost growth; when economic growth picks up, GDP-linked payments will be higher precisely when the country can afford it.