Governments risk killing economic recovery if they withdraw stimulus spending too fast, and Germany could be spending more now to secure a surer rebound, OECD Secretary General Angel Gurria told Reuters. "The name of the game is to move from a policy-driven recovery, which we have now, ... to a self-sustaining growth," Gurria said in an interview.
But that remained a big leap, he said in remarks before leaders of nations that produce 90 percent of world GDP meet in Italy on July 8-10. "You go headfirst into nosedive if you do not have the structures that hold up self-sustaining growth. It's not there; it's as simple as that," he said in the telephone interview, which was conducted on Monday.
In Italy leaders of 40 nations, including the G8 industrial powers plus China, India and Brazil, will review efforts to engineer a recovery with trillions of dollars of public money. Germany is already pressing other countries to produce a clear "exit strategy" for when the worst of the crisis passes, aimed at reducing the huge budget deficits which the stimulus spending has helped to create.
Gurria said the Organisation for Economic Co-operation and Development saw tentative signs of stabilisation. "I think we are going to - and are seeing already - the results of massive infusions of resources (public money)," he said. Asked if he expected GDP to resume growing in the third quarter of this year in Europe and the United States, Gurria said: "The answer is yes".
Countries such as China, the United States, Japan and Australia have spent heavily on stimulus. South Korea had focused in particular on job creation, and Gurria said others should do likewise. Europe needed more action in general. "Europe could do more, and I have to say clearly Germany started with a really very solid fiscal position ... Clearly that's a place where there's some room," said Gurria. "When in doubt, go for stimulus."
This is unlikely to go down well with German Chancellor Angela Merkel. Gurria acknowledged that the situation was not likely to change in Germany as elections loom in September.
Merkel is set to press her case on the exit strategy at the meetings in Italy but, according to information gleaned from several sources by Reuters, she faces stiff resistance from the United States, Britain, Japan and France, among others. The OECD, an agency funded by 30 mostly wealthy economies, said last month it expected the recession that spilled out of the United States to be slightly less severe than it previously thought, and it forecast marginal growth next year.
It predicted GDP would contract 4.1 percent in its member nations this year, rather than the 4.3 percent it previously envisaged. It also forecast a minor 0.7 percent rise next year instead of a further dip. But Gurria said one of his big fears was that the recession could permanently impair longer-term economic growth potential.
The crisis could set the economies of the OECD and beyond back by four or five years. But there was also a serious risk that higher structural unemployment, slower lending and weaker capitalisation could cap the economy's growth potential. Economies' growth capacity could be perhaps two percent less than levels achieved before the crisis on average in the OECD, and twice that in some countries, he said.
"We're not talking about going back to where we were before," he said. This was why stimulus spending needed to be geared more to job-creation than currently and a stress also put on more environmentally-friendly projects, he said. "When you have scar tissue, the scar tissue becomes both the manifestation that you had a big accident and an impediment to normalisation," he added.
China is pushing at the meetings in L'Aquila for debate about the dollar's future as the world's reserve currency. Any currency could be part of the global system of reserve currencies as long as it was freely convertible, Gurria said.
The Chinese yuan and Russian rouble are not. "The greatest concern I have is that all players play by the same rules," said Gurria, without naming names. "The ones who have surpluses - their currencies tend to appreciate. The ones with deficits - their currency tends to depreciate, as long as you have convertibility." As for heavy media coverage of Russian and Chinese demands for a shift away from dollar dominance, Gurria said: "I'm not losing a lot of sleep over it."
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