Even as the leaders were meeting over the weekend, bad news was tumbling out. International agencies and western governments are making their pronouncements about the prospects for their economies and in turn global economy. The Organisation of Economic Co-operation and Development (OECD) has given out its report on G7 economies which indicate these economies’ growth to slow down in the rest of the current year. OECD expects the developed countries grow by just 0.2% from September end till the end of the current year. G7 are the most developed high income group of countries in the world and until recently they set the tone for the rest of the world. Excepting Canada, none of these countries including UK, Germany, Italy, France, US and Japan, are showing growth rates of above 1% in the fourth quarter of the 2011. If they slide into another recession, which is not unlikely, global trade will slump and this will surely affect the Asian economies which have been growing until now.

The leaders of the G7 therefore huddled to find answers to their economic woes and suggest ways of revitalising their economies. But the question is what steps can help them gain that objective. Already, the interest rates in most of these economies are at rock bottom. In the US it is close to zero, in the EU these are very low and Japanese interest rates are almost negative. Of these economies while Japan was showing some signs of growth and seemed to be about to emerge out of its downturn, the repeated natural calamities like earthquake to typhoons are pulling it down. On top, the yen is rising and hurting the country’s export based sector in their bid to capture at least the Asian markets. Japan is desperately trying to douse the fire of rising yen by releasing more and more money into the system.

In the midst of these struggles, the US announced another large stimulation package for creation of jobs last Friday, which however is more political than economic. When the country is facing a spurt in public debt, the US President Barack Obama has announced $450 billion package for infrastructure spending, jobs creation for teachers and workers and some tax cuts for the ordinary people. The political problem, on the other hand, is that the Republican Party, which controls one of the houses which has to clear the bill for implementation, do not see much merit in the new announcement other than refurbishing the image of the president before next year crucial re-election process. At any rate, such a programme will add to US fiscal deficit, when the government had announced plans for cutting these.

The bigger problem is surely the European debt. The serious debt problems in the EU and the consequent efforts to bring down fiscal deficit through austerity measures are having major deflationary impact on the EU economies. Even the strongest among them, Germany, is now witnessing a fall in exports by 1.4% and the OECD forecast a contraction in the German economy in the first quarter of next year. The UK has however shown some improvement though according to OECD it cannot escape from the general trend and is likely to show sluggish trends henceforth. Only silver lining for Britain is that its deficit and public debt are showing improvement and therefore attracting some attention from investors.

The G7 leaders are searching for tools to revitalise their economies and restart the growth process. In the run up to the G7 meet, the, new chief of the International Monetary Fund (IMF), Christine Lagarde, has urged the governments of G7 countries to take every step they can think of for keeping up the pace of their economies. She has urged the central banks to maintain low levels of interest rate. But what steps?

Some economists are openly stating that the instruments for rejuvenating the economies have been exhausted and there are not many tools still available for this purpose. Some economists are saying the US and Europe have fallen into a “liquidity trap” where there is enough money in the system but not enough demand. On the other hand, the interest rates have reached rock bottom and there is hardly any scope for further cutting these to stimulate the economies.

Earlier in the month at the Jackson Hole meeting of the US Federal Reserve, its chairman, Ben Bernanke, refrained from another “Quantitative Easing”, which was largely expected. QE, as it is commonly known, is simply money creation by a central bank by buying government securities from the market, although the financial markets were expecting such a move. Instead Bernanke had criticised the US government for its failure in controlling budget deficits and pointed out that monetary policy on its own cannot do much in the circumstances and push up overall growth.

The Jackson Hole meeting of US Federal Reserve has been traditionally important for giving new orientation to economic policy. The US Federal Reserve holds the meeting at Jackson Hole where the Fed chief invites select central bankers across the world to brainstorm over two days the issues before the global economy as well as the United States. The consultations among central bankers date back to the thirties when in the aftermath of the Great Depression of 1930 the central bankers of Britain, France and Germany were invited to talk among themselves the ways of coming out of the deep slide in their economies. Additionally, the question of German reparation also was on the agenda. However, this time Jackson Hole did not yield any new breakthrough.

As if to confound the present confusion further, the chief economist of the European Central Bank (ECB) has resigned over what appears to be the increasing purchase of the bonds of highly indebted European countries by the ECB. There are deep rifts within Europe on the conduct of economic policies. The bitter question that is splitting countries is how to handle the debt problems of severely indebted countries. While, some have advised larger accommodation to the indebted countries like Greece, Ireland and Portugal, and now Italy, others are opposed to this. Germany, for example, had earlier advocated a serious austerity drive as a pre-condition for bail out. Meanwhile, reviewing the world economic situation the World Bank president, Robert Zoellick, has warned of the possibility of global economy getting into a second recession.

The cup of woes of western economies seems to be full now. (IPA Service)