Excessive caution

When the world's leading institutions start intoning a requiem, it's worth listening up. And it is to be acted upon — that is what the true spirit of caution requires, not conservatism. On Thursday, the Organization for Economic Cooperation and Development (OECD) joined the International Monetary Fund (IMF) in painting a picture of further recession, particularly in the West. Perhaps not as deep as the crisis that hit in 2008, but nevertheless a cause for concern.

The OECD says that in the last quarter of the year growth in G7 nations will be just 0.2 percent. Germany was once looking at three percent growth; it is now forecast to decline by 1.4 percent. The budgetary problems facing the United States, Japan's stalled growth due to this year's tsunami and the Fukushima disaster, along with Europe's sovereign debt crisis all add up to a drop in consumption, a decline in consumer confidence, and a slowdown in investment: in other words, stagnation, and with no sign of a recovery in the short term.

The OECD's picture is remarkably similar to that painted by Christine Lagarde, the head of the IMF. She says that unless action is taken immediately, the West is looking at a deeper recession than the one we are already in. She is proposing spending cuts with Keynesian demand stimulus to get things moving. The OECD seems to share Lagarde's diagnosis and treatment to the letter, and wants to apply it to fiscal, as well as monetary policy. "Where possible, interest rates should be lowered," said Pier Carlo Padoan, the organization's chief economist on Thursday.

We seem to now be entering the third phase of trying to deal with the recession: first we saw defense of public spending aimed at stimulating the economy, combined with measures to save the banks; then came harsh spending cuts aimed at balancing the books; and now comes a mash-up of the two: spending cuts combined with stimulus. Given that these two measures run contradictory to each other, it might be an idea if we were told just how our governments intend to pull this off.

In the wake of the storm provoked by the Republicans' full-frontal opposition to Barack Obama's budget plans this summer, we have yet to see which approach the United States will take, both in terms of its employment policy and the budget deficit. All we can do is note that the world's main financial institutions agree in their analysis of the situation. The European Central Bank (ECB) on Thursday joined in the bleak predictions for growth in the euro zone for this year and next. "The risks of a further downturn have increased," said its president, Jean-Claude Trichet.

But one thing is the ECB sharing the OECD and the IMF's diagnosis; agreeing with their choice of medicine is quite another. The ECB hasn't announced a drop in interest rates, contrary to the hopes of the more optimistic observers. But at least it hasn't raised them as its behavior before the summer suggested it would. That would have been a big mistake, given that inflation is under control. But its current approach is not enough. Measures are needed to kick-start the economy. The ECB is dragging its feet.