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Calls for continuing stimulus measures until the global economy recovers with sustainable growth, strengthened Friday, when the International Monetary Fund Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet voiced their support.
Speaking at the sixth annual Bundesbank Lecture in Berlin, Strauss-Kahn said he sees a real danger that policymakers may jeopardize the recovery by exiting from crisis measures too soon. But, he said it is the right time for policy makers to formulate their exit strategies.
The IMF official said, "Given the fragility of the recovery, there are risks that it could stall."
A day earlier, Australian Treasurer Wayne Swan raised similar concerns saying that a premature withdrawal of stimulus measures would stall global recovery. He said Australia would gradually withdraw their stimulus measures in the last quarter of this year and would continue it through to 2011.
Meanwhile, Strauss-Kahn stated that early exit from accommodative monetary and fiscal policies is a principal concern. In addition, problems in the financial sector could persist or even intensify further, particularly if efforts to restore banks to health are not completed.
"Now is not the time to exit. But I would like to make it clear that the ECB has an exit strategy, and we stand ready to put it into action when the appropriate time comes," Trichet said at the ECB Watchers conference in Frankfurt. He stressed that it would be premature to declare that the crisis over.
Trichet noted that the ECB's non-standard measures, introduced to address the financial crisis, were designed with exit considerations in mind.
"Given their exceptional nature, these measures will have to be unwound once conditions return to normal. Of course, we designed technically the measures with their exit in mind," he said.
On Thursday, ECB policymaker Jürgen Stark said if the gradual improvement in financial conditions since the beginning of the year is due to policy measures by governments and central banks, it would be a "classical case of morale hazard." He warned that there is risk of a re-emergence of moral hazard once temporary measures by governments and central banks are perceived by financial market participants as permanent.
In an interview with the The Independent newspaper on Wednesday, UK Chancellor Alistair Darling urged governments to continue spending to pave the pave for a sustainable recovery. He also said, "You must have a plan that allows you to exit in a way that is consistent with allowing the economy to grow again. Don't for goodness' sake get out of them before you have completed the job."
The U.S. Treasury Secretary Timothy Geithner said on September 2 that it is too early to withdraw the unprecedented stimulus as there is a 'long way to go'.
Germany and France now want a coordinated exit from stimulus measures as they technically exited the recession. German Finance Minister Peer Steinbrueck has placed his need in a letter to G-20 finance ministers and central bank heads.
Exit from mass stimulus measures in place would be a hot topic for the G-20 finance ministers and central bankers meeting in London that starts today. The meeting is a preliminary to the G-20 leaders' summit in Pittsburgh on September 24 and 25.
In a letter to the Financial Times, French Finance Minister Christine Lagarde and others said they will call for a strict compensation policy for banks to be put in place, at the meeting in London.
The letter was signed by Finance Ministers of Sweden, the Netherlands, Luxembourg, France, Spain, Germany and Italy.
The Organization for Economic Co-operation and Development said Thursday that governments will need to continue to stimulate their economies as rising unemployment and weak housing markets continue to dampen private demand. The current exceptionally low interest rates should remain in force for the time being, the think tank said in latest interim economic assessment.
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