Policymakers from the Group of 20 nations and their market-based critics are missing the point about “exit strategies”. The G20 is right to announce that there will be no premature exits from macroeconomic stimulus and to reassure us that monetary tightening will be technically manageable. Yet, it is overlooking the more complex challenges that economic policy must confront as a result of the emergency measures undertaken since mid-2007.
The exit strategy needs a wider remit and greater international co-ordination. There are three dimensions to what has to be done – monetary, fiscal and financial – not just one. That is: monetary ease must return to normal interest rate policy; discretionary fiscal stimulus must shift to putting government budgets on a sustainable path; banks' guarantees, and state-ownership stakes, must be withdrawn. The G20 discussion has largely ignored the complexities in two ways.
First, there is a challenge of sequencing, given the interaction between exit measures. Should fiscal or monetary tightening come first? When should re-privatisation of banks take place? Would withdrawal of current extraordinary liquidity and deposit guarantees accelerate or offset monetary tightening? Should tax rises target or spare the financial sector?