EDITORIAL: G-20 financial summit

The global economic outlook is getting murky again. This begs the question: Should policy priority be given to economic recovery or fiscal rehabilitation?

Finance ministers and central bankers from the Group of 20 leading economies were unable to come up with a clear-cut answer during their recent summit in Busan, South Korea. In a joint statement, they called on countries to pursue both goals. The document stressed the importance of sustainable public finances while also pointing to the need for economic growth.

While welcoming the actions taken by the European Union and other nations and organizations to deal with the Greek and euro crises, the communique urged countries in dire fiscal straits to accelerate the pace of consolidation.

The global economy is shifting focus from risks of crisis in the financial sector to fiscal crisis among governments. This shift is inevitable in a sense. The financial crisis pushed the world into a synchronized recession. In response, governments adopted aggressive fiscal stimulus measures, which improved their economic situations. But these coordinated policy efforts left many countries worse off. Concern over the financial health of banks holding huge amounts of government bonds issued by debt-ridden countries could trigger a new round of financial market crisis.

The public finances of a number of countries in Europe, along with the United States and Japan, are in really bad shape. A steep tax increase that could nip the recovery in the bud is not an option. There is now an urgent need to lay a medium-term plan to restore fiscal health so as to bolster market confidence and put the recovery on a firm footing.

Another important lesson to be gleaned from the global financial slowdown and the ensuing fiscal crisis is that we must figure out ways to prevent economic bubbles of epic proportions.

Until recently, the mainstream view among economists was that central banks cannot prevent the formation of bubbles with their monetary policies and should focus on swiftly dealing with the bursting of bubbles through monetary easing and other measures. But this approach has allowed a series of new bubbles to develop.

The collapse of dot-com and housing bubbles in the United States was followed by the bursting of housing market bubbles in parts of Europe. There is also concern about the same thing happening in emerging economies. The effects of a bubble, once burst, cannot easily be contained with fiscal expansion. The effects tend to be prolonged. It is not surprising that the mainstream view about economic bubbles is now being called into question.

Basically, a country's monetary and fiscal policies should be tailored to its economic conditions. If a country or area with a large economy keeps interest rates low for too long, its loose monetary policy results in creating bubbles elsewhere in the world through international flows of capital. Eventually, the consequences of the monetary policy will come home to roost.

It is difficult to forestall the creation of bubbles with monetary policy alone. But countries should try to limit the size of bubbles by combining their regulatory and supervisory efforts. International cooperation based on a global perspective is important in implementing monetary policies and building supervisory systems.

From this point of view, it is essential for finance ministers and central bankers of leading economies to hold candid talks and share perceptions at forums like G-20 meetings.

There is a big question mark over Japan's ability to promote such efforts. During the past year, two prime ministers have quit and a third has just taken office. During that time, the nation has had four finance ministers. Japan will lose the trust of the international community if it doesn't stop playing musical chairs with its leadership.

--The Asahi Shimbun, June 8