This time France and Germany are right ”” and America is wrong. To the extent that there was a real transatlantic difference of opinion at the G20 finance ministers’ meeting this weekend, the Germans and French had economic logic on their side in resisting American demands for extra fiscal stimulus and trying to focus the discussion on strengthening the big global banks.
For while there may be a case in the future for additional tax cuts and public spending programmes to boost economic demand, the immediate priority must be to restore the stability of the world financial system and to persuade or force banks to start lending again to non-financial businesses and consumers.
Until the banks return to something like business as usual ”” which does not mean the insanity of the 2004-06 boom years but the normal availability of credit on sensible terms to sound borrowers ”” additional fiscal stimulus will not do much good. If, on the other hand, the banks were stabilised and the moderate reduction of credit that is still required were allowed to proceed in an orderly manner, as was broadly happening until the collapse of Lehman, then the world economy would probably emerge from recession in the next six months or so, without any need for further macroeconomic measures.