The current debate in Europe and America over the need for stimulus seems strange to most Asians. When people from China visit the west, they see economic paradise in these supposedly stagnant economies. After all, stagnation at such a high income level isn’t so bad; just ask the Japanese. But whatever happens in the current economic debate, relative stagnation in the west is inevitable in the medium term.
At the moment the global economy appears to be double-dipping, and many (including those in this Financial Times debate) have argued for another round of stimulus. But another round of spending would support growth only temporarily, while increasing the risks of more sovereign debt crises, more overheating in emerging economies, and pushing the global economy into high inflation down the road.
There are well-known arguments against unlimited stimulus. The bond market could freak out over excessive national debt. Currency values could collapse. When an economy faces structural imbalances like now, the impact of stimulus on employment is low. But there is a new and perhaps more powerful case for austerity: globalisation has made even large economies such as America, which used to operate under special rules, behave as if they were small, open economies.