Admittedly it is difficult to distinguish between illiquidity and insolvency when dealing with countries; but there is, in fact, a difference and the responses to each can have crucial repercussions. Pumping liquidity in the ocean of debt will not improve solvency; instead it carries the danger of added inflationary pressures which further feeds economic turbulence. While debt restructuring may be unpalatable to creditors, it is, in all likelihood, a reality. Facing up to this reality with a transparent and viable plan can help diminish the uncertainty that is paralyzing private sector activity and fueling volatile market sentiment.
Furthermore, uncertainty often breeds fear and fear begets the temptations of protectionism. In this context, G-20 leaders could consider openly embracing the fact that tackling the economic issues that are plaguing the global economy does not mean reducing economic openness and integration in the world economy.
Richard Fisher of the Federal Reserve Bank of Dallas underscored the belief that uncertainty is a leading driver of stalled economic recovery when he said: “Right now, nobody knows what the tax regime is going to be. Nobody knows what the spending patterns are going to be. No one knows how much regulatory change is going to take place. The greater the clarity, the more you remove a factor of uncertainty. Even if (businesses) don't like it, they'll figure out a way to navigate their way through it. Right now, there are no decisions being made. And it undermines confidence.” While he was referring to circumstances in the U.S., his sentiment is just as applicable to much of the global economy.
At the end of the day, resolving the challenges facing the global economy requires a political solution. While it is difficult to determine whether such a solution will completely counter uncertainty, we do know that from whatever perspective one considers the choices to be made, they will not be easy ones. But difficulty is not a reason for inaction. Developing and implementing a viable roadmap that will help policy makers and business leaders navigate the maelstroms of this storm will go a long way towards reinvigorating sustainable economic growth and strengthening global economic security.
