NO NEED FOR AN ORDERLY QUEUE TO EXIT / THE FINANCIAL TIMES COMMENTARY & ANALYSIS

No need for an orderly queue to exit

By Jim O’Neill

Published: September 17 2009 23:08

Heads of state preparing for the summit of the Group of 20 leading countries next week have been emphasising the need for a co-ordinated “exit” strategy from their expansionary monetary and fiscal policies. But it is not clear it will be as easy or as important as their – admirable – co-operation in the Lehman aftermath.

When everyone is suffering from what appears to be the same shock, the desire to implement a co-ordinated response is high, and because of that desire, the ability is stronger. When everyone is starting to recover, the desire to co-ordinate is inevitably lessened, and as a result it will be more difficult. Luckily, this is probably a good thing, as some countries may need to exit earlier than others.

Until Lehman Brothers collapsed, it seemed as though a number of countries around the world, while seeing their economies weaken, had not suffered dramatically; recessions seemed far from inevitable. Indebted economies, ranging from the US through the UK to Russia, appeared to be heading toward recession, but the severity of the recession was debateable. Other less-bubbly economies only really fell into recession after Lehman failed and the world trade system seized up. Some of these countries have yet to meet the traditional definition of a recession: two back-to-back quarters of shrinking gross domestic product. Australia is one and Poland another. As the crisis abates do these countries really need the same fiscal or monetary support as others?

Consider two other important aspects. It appears as though G20 leaders will encourage their regulators to force banks to hold more capital, especially in good times, so they will be better prepared in bad times. All agree that this is a good thing. But not all G20 countries behaved in the same manner in the build up to the crisis with respect to their banking systems. Adoption of capital rules adjusted for the economic cycle will not be a challenge for all of them. Australia, China, Brazil, India and, despite its property slump, possibly Spain are just five. Maybe there are more. It is not only understandable, but justifiable that some central banks will regard new capital rules as an additional and unnecessary economic challenge. Monetary policy should not be constrained by such a challenge for those that already have a better regulatory structure.

Moreover, in so far as many of these countries, especially the smaller open ones, have benefited from the stimulative policies of the large economies, it is reasonable to ask whether they should exit earlier than others. Australia appears to have given its verdict, and we expect it will tighten monetary policy before 2009 is over.


Virtually every day we hear from policymakers that they will, somehow, prevent financial bubbles in future. Politicians making these claims often pinpoint the private sector as the culprit for these past two years of crisis. But Keynes’ “animal spirits” are difficult to keep under lock and key. If policymakers really want to prevent bubbles, it will mean that setting interest rates by inflation and output targeting will need to be augmented by something else, perhaps indices of financial conditions, similar to the European Central Bank’s approach. For some countries where the financial system remains intact this suggests an earlier exit strategy. On the other hand, those mired in the meltdown of their financial sectors, especially where the taxpayer has funded bailouts, the recovery is fraught with unpredictability. Early exits here make little sense.

Fiscal policy provides a third argument for why co-ordinated exits are not necessary. The build up in global imbalances, while not the cause of the crisis itself, perhaps made it inevitable.

The crisis forced a policy response including measures to stimulate domestic growth in high-savings countries in a manner not likely otherwise to have occurred. China is the clearest example, but Germany has also done its bit. The newly-elected government in Japan also seems to be aware of this new environment. None of these countries, with high(er) domestic savings and many years of accumulated current account surpluses, should be thinking of exits in the same way others clearly need to.


G20 members and their leaders have been very wise in the past 12 months. The G20 creation itself is a fantastic development. But let’s not require it always to have its members do the same thing at the same time.

The writer is chief economist at Goldman Sachs

Copyright The Financial Times Limited 2009