[Viewpoint] Sound economics ahead of politics

Skies were high and deep blue for the first time in many weeks. But the economy at home and abroad remains in dark clouds and gloominess. Jittery sentiment permeated the air, and investors continued to dump shares Friday on fears of more bombshell news over the weekend from both sides of the Atlantic.

We cannot know when the rollercoaster ride will end. With rising concerns about a prolonged recession, or a double dip, even the most optimistic say the global economy is unlikely to budge out of the soft patch for some time.

All sides agree that the world economy is mired in a foggy phase. The leadership of the European Union - the epicenter of the credit crisis - is still struggling to trot out a common solution to tackle its problem, and the United States remains shaken after suffering a downgrade of its sovereign credit rating.

Eyes are on southern Europe with Italy being required to repay maturing government bonds worth 39 billion euros ($56 billion) by next month and with Greece bargaining with private creditors over a credit restructuring plan. If worse comes to worst, the world economy may confront another domino financial crisis.

Chancellor Angela Merkel of Germany, which so far has been hauling the rest of the euro zone, reiterated opposition to issuing bonds backed by all the euro zone countries, saying such a plan would only turn the EU into a union of debt, not security.

Without removing the ticking credit bomb in Europe, prospects for the U.S. economy will only worsen. Investment banks Morgan Stanley and Goldman Sachs cut their forecasts for the world’s largest economy as economic data - consumer prices, unemployment, industrial activity and housing - all turned from bad to worse. Goldman Sachs lowered its growth estimate to 2.1 percent from 3 percent and the yield on 10-year Treasury notes plummeted to below 2 percent for the first time since 1950, fueling fears that the American economy is headed for a double dip.

But policy makers have few options left on the table to reverse the situation. U.S. Federal Reserve officials are due to meet in a symposium in Jackson Hole, Wyoming, on Friday for an annual conference where investors will be watching for a cue from Federal Reserve Chairman Ben Bernanke’s speech.

Last year, Bernanke boosted investment sentiment by hinting at a second round of bond purchases to stimulate the economy. With the Fed already having promised to keep the benchmark interest rates at near-zero levels for at least two more years, it will not likely resort to its last remaining option - a third round of quantitative easing - at the current stage.

The two rounds of heavy monetary easing that ended two months ago have proven insufficient in bolstering the economy. Another bond purchase won’t likely make a great difference. The Obama administration plans to announce a new set of economic measures possibly next week. But whatever stimulus measures Washington comes up with, any spending would hardly be heartily agreed to by the opposition Republican Party, which wrangled with the debt ceiling until the last minute before a default crisis.

Amid signs of a prolonged slowdown and deepening recession in the world’s major economies, alarming signals are going off in many parts of Korea’s economy. The pace of growth rapidly slowed and stocks as well as the debt and currency markets turned volatile. Risks of stagflation may rise if the economy grows at a snail’s pace amid high consumer prices.

We should not be overly alarmed, but drivers of the economy still need to shift to a more combative gear. The option of lowering the key interest rate should not be employed because of inflationary risks and worrisome levels of household debt. The central bank should stay put on interest rates for now.

The remaining option is fiscal spending. The government has vowed to work toward balancing the budget by 2013 after learning from the global sovereign credit crisis. But it nevertheless would have to exercise flexibility given current circumstances. It should not stall in employing necessary fiscal tools because of a certain policy goal. Authorities must place economics ahead of political interests and differentiate welfare spending that could weigh down the fiscal balance.

*The writer is a senior columnist of the JoongAng Ilbo.

By Park Tae-wook