G8 needs bailout exit strategy

Group of Eight (G8) finance ministers recently met to discuss how they would handle the unwinding of some of the stimulus spending.

At the same time, every second article or television broadcast one hears speaks of the "green shoots of economic recovery" like it is some sort of message that needs to be drummed into people's minds in the same way the "smoking gun could be a mushroom cloud" was.

The fact is when you spend as much money as the G8 countries spent in the past six months and are yet to spend in the next, you will definitely produce results.

Unfortunately the big elephant in the room that everyone seems to want to ignore is unemployment because it raises a contradiction in current policy that cannot be explained away.

G8 finance ministers have so far recapitalised the banks to strengthen their balance sheets, bailed out strategic companies in need and called for increased efficiency.

The message up to this point was clearly understood. However, while there was talk of learning from the mistakes of the past ten years, these same governments are now asking companies and banks to return to their old ways as soon as possible.

Behind the scenes, banks are being pressured to begin lending again in the same irresponsible way that caused the mess in the first place and they are expecting companies to begin employing again even though becoming more efficient usually means letting people go.

Italian finance minister Giulio Tremonti was warning that the stimulus spending "may already be recreating the kind of financial speculation that was at the root of the economic crisis."

It must be said that G8 finance ministers recognise that there are many problems that could still arise along the way and that is to be commended.

Whether people agree or disagree with the way the financial crisis was initially handled is not important at this point because in reality it wasn't politically feasible to allow companies and banks to fail in order to let market forces clean up the economy.

Voter discontent played a crucial role in making governments increase public debt to unprecedented levels since they had to be seen doing something but now they may be making the mistake of pressuring banks and companies to increase activity.

However, should the stimulus plan work and a genuine recovery begin, it will then all depend on how well they can manage unemployment to make recovery sustainable.

IMF chief Dominique Strauss-Kahn warned at the meeting that global unemployment would peak in 2011. In none of the G8 countries does the situation in that respect look like its abating.

This is why it is premature to talk about stabilisation when there is still so much more to come from the crisis. Governments have already taken a massive hit from the loss of tax revenues and at the same time having to increase welfare spending.

Should unemployment continue to rise, the problem will only become worse as consumer spending is directly related to how secure people feel and how strong their balance sheets are.

It is also no good to say we need to unwind some of the stimulus spending when there is nothing to fall back on. US Treasury Secretary Timothy Geithner did well to speak out for signs of a genuine recovery before the efforts of the past six months are rolled back.

G8 finance ministers are now committed to a strategy whose failure or success is yet to be seen. However, their apparent lack of unity does not bode well for the future.

Stress testing on European banks and developing exit strategies are necessary requirements for success, which they failed to agree on. The healthy discussion that took place showed that some ministers were honest about the current situation.

It was a welcome surprise to listen to what some ministers had to say without too much politicising. The sooner the facts are on the table, the better. Europe needs to implement the stress tests and announce the results as soon as possible, whatever the results might be as this crisis is more about confidence than anything else.

The more honesty there is between people, the more trust can be built up again. Hopefully, people can have confidence to go about their business and spend without worrying about losing their jobs.

- Mohammad Fathi is an economist and independent consultant based in Vienna