Austerity vs. Growth - A false choice, says Christine Lagarde
Source: IMF , Author: Posted by BI-ME staff
Posted: Tue May 8, 2012 8:41 pm

INTERNATIONAL. Restoring solid, sustained and balanced growth is the central economic challenge facing the world today, said Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), emphasizing the importance of well paced, country-specific credible fiscal adjustment combined with reforms aimed at increasing growth and jobs.
 
“Clearly, today’s global economy needs higher and better growth. Getting there depends on choosing the right combination of policies. With the wrong choices, we risk losing a decade of growth, a generation of young people, and an opportunity to put the global economy on a secure footing,” she stated in an address entitled “Anchoring Stability to Sustain Higher and Better Growth.”
 
The IMF currently estimates global growth to be about 3½ percent this year.
 
Growth in advanced countries is expected to be much weaker at 1½ percent in 2012, including a mild recession in the euro area.
 
Emerging markets and developing countries are holding up much better, with expected growth of 5¾ percent. However, there are 200 million people worldwide who cannot find work, including 75 million young people. “This is a potential disaster—in economic, social, and human terms,” Ms. Lagarde warned.
 
“In advanced economies, especially in Europe, the issue is well understood, but people have very different views on remedies. They gravitate toward one of two camps—growth versus austerity. The growth camp says that we need more government stimulus to increase growth. The austerity camp says that markets are sitting in judgment over a mountain of public debt, and governments need to do what is necessary to reduce that debt as fast as possible.
 
“These positions are slight caricatures, but—as you know—austerity versus growth is very much the debate of the hour,” Ms. Lagarde noted, and added, “I believe it is a false debate. I would argue it is not ‘either/or’. Countries can choose a strategy that is good for today and good for tomorrow. Good for stability and good for growth.”
 
Ms. Lagarde noted that the extremely loose monetary policy would normally lead to high demand growth. “But these are not normal times” she said. “The monetary engine cannot do the job alone. In fact, growth is being held back by three “brakes” in the system—fiscal adjustment, weak banks, and poor housing markets.”
 
Among the advanced economies, the ratio of debt to GDP is expected to hit 109 percent in 2013—the largest ratio since World War II. “This has to come down,” the IMF Managing Director stated. “At the same time, we know that fiscal austerity holds back growth, and the effects are worse in downturns,” she said. “So the right pace is everything—and the right pace will be country specific.”
 
“Countries need to keep a steady hand on the wheel. This means that if growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets. In other words, they should not fight any fall in tax revenues or rise in spending that comes about solely because the economy weakens.” Ms. Lagarde stated. “So again, there’s no avoiding this brake of fiscal adjustment. But if calibrated correctly, we can make sure it doesn’t do too much harm to growth”.

 The other two brakes, weak banks and poor housing markets must continue being addressed at country and regional levels.
 
Ms. Lagarde also called for countries to implement reforms to make product and labor markets work better, especially in the countries of southern Europe that have lost competitiveness relative to their trading partners.
 
“Over the medium term, reforms will pay off”, she said. “Some preliminary analysis by the IMF for the euro-area countries suggests that over five years, large-scale product market, labor and pension reforms could boost GDP by could boost GDP by 4½ percent. Part of this reflects the magnified gains from a synchronized effort, showing the importance of everybody moving together.”
 
Ms. Lagarde also called for greater economic cooperation across a range of areas—rebalancing the global economy, financial sector reform, and the global financial safety net.

 

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