Soap box: When the stimulation stops, what's left to give life to economy?

GLOBAL economic policymakers have lifted their foot off the accelerator while fervently denying accusations that their foot is on the brake. However, economies have still to demonstrate any meaningful recovery.

In China, the authorities have twice increased the reserve requirements on banks, forcing them to hold higher reserves for any level of lending, in an effort to bear down on the very rapid lending growth seen in recent months.

In the US and the UK, the quantitative easing (QE) measures that saw large scale purchases of bonds by the central banks have come to an end. Although policy in the US has begun to "normalise" with the recent increase in the discount rate (normally 1 per cent above the Fed Funds rate, but currently half of this premium). In recent months the European Central Bank has been tightening the terms and reducing the volume of liquidity that it supplies to the markets.

In parallel, many of the temporary fiscal measures announced last year have run their course.

However, the Greek crisis of recent weeks has helped concentrate minds on the size of fiscal deficits. Greece is already having to announce very painful measures to raise taxes and curb government spending this year, and other countries in the EMU such as Portugal, Spain and Ireland are realising that they too could face similar problems to Greece. In turn, they too are becoming much more active in rectifying their budget deficits.

Even in France there is a realisation that government spending levels need to be urgently reviewed. In the UK there is a clear political consensus that there needs to be a credible plan to reduce the deficit.

The conclusion is clear: the stimulatory policies adopted last year, which were responsible for ending the devastating recession following the credit crisis, are ending. However, in general, they are not being reversed, but neither are they being extended.

So we appear to be at an inflection point in global economic policy. Some commentators are claiming that the tightening of liquidity provision in China and Europe was in fact the key reason that the Greek crisis blew up.

Should the western economies slip back into recession, governments face a major problem – there is no scope left to pursue conventional policy responses. Interest rates remain stuck near zero and cannot move any lower, and governments fear that their current levels of deficit and debt preclude them from easing fiscal policy in any shape or form.

Which all rather begs the question of what will happen in the face of a double-dip recession. The answer is clear in the UK and the US, if their central bankers are to be believed. They will simply print more money, a policy that will ultimately work if pursued aggressively but one which unquestionably runs significant inflation risks in the longer term.

In Europe, however, printing money is an option which will not be adopted. There the conclusion must be that economic policy options are now exhausted, and further economic weakness will be not be met by any policy response.

• Jeremy Beckwith is chief investment officer at Kleinwort Benson.