Western nations played a leading role after World War II, but the world order is now changing fundamentally. Advanced economies are facing a dead-end and the current debt problems shaking the global economy are a result of that predicament.
Not only can those nations no longer expect the same growth as in the past, but they also have to repay an increasingly heavy debt burden.
Now is the time for those countries to acknowledge the difficult circumstances they face and take the necessary steps toward resolving their problems.
In Europe, the Greek fiscal crisis has led to concerns about the fiscal status of Spain and Italy as the bond prices of those two nations have plummeted.
The United States has also had its credit rating downgraded for the first time in history, because its government’s plan to reduce debt was regarded insufficient.
Most government bonds are held by financial institutions and they could be destabilized if bond prices dive.
There is now a greater possibility of a recurrence of the financial crisis that hit in the autumn of 2008 after the collapse of the U.S. investment bank Lehman Brothers.
The Group of Seven nations must do everything possible to placate financial concerns.
However, the lack of specific measures in the declaration issued by the G-7 on Aug. 8 meant that no brake was applied to the falling stock prices and the depreciation of the dollar against other currencies. In short, the declaration did little to end the confusion in global money markets.
Europe must improve its support framework for Greece and restore trust in the bonds of European nations.
In an emergency, the central bank must provide funds to the market to contain concerns. The United States should work in cooperation with Japan and Europe to stop the fall of the dollar and end confusion surrounding the foreign exchange market.
That alone will not resolve the debt problem. Advanced nations face a long and difficult road ahead.
With a smaller margin for growth among advanced nations as well as the rise of newly emerging economies like China, advanced nations are no longer able to monopolize the fruits of the global economy.
Since the 1990s, advanced nations were able to increase investment by flooding money markets with funds and inflating their economies.
The collapse of Lehman Brothers burst that bubble. In order to overcome the subsequent recession, various nations implemented a series of economic stimulus measures by incurring debt. That, in turn, has led to the current crisis.
There is nowhere to go, especially with concerns about whether that debt can be repaid.
Unfortunately, there is no instant remedy for the problem.
The only way to resolve the problem is by persistently reducing expenditures and rebuilding fiscal health through tax increases.
Because the economy will be negatively affected if such measures are implemented suddenly, a medium- to long-term plan must be put together and implementation of that plan must begin immediately.
Such action would reassure the market.
However, rebuilding a nation's fiscal condition is never an easy proposition, as has been made abundantly clear by the confrontation in the United States between the Democrats and Republicans over reducing debt and the debate in Japan over whether the consumption tax rate should be increased.
A major reason is that politicians in democracies are hesitant about asking the public to bear additional burdens. If nothing is done about the increasing debt, bond prices will eventually tumble, leading to a serious financial crisis.
Democracies, including Japan and the other advanced economies, must now show that they have the resolve to act.
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