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Global Economic Recovery: IMF Warns against Losing Hope
- By Williams Ekanem
- Published August 23rd, 2011
- Washington File
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Managing director, International Monetary Fund, (IMF) Christine Lagarde has assured that all hope is not lost on global economy recovery as structural reforms taken across the globe will take a while to have impact.
The new IMF boss stated in a commentary that the current market turmoil, marked by a huge spike in uncertainty, has shaken confidence across the global economy and prompted many to conclude all policy options have been exhausted. That impression is wrong – and could lead to paralysis.
Writing in the Financial Times, Lagarde pointed out that “after the crisis unfolded in late 2008, global policymakers came together to act with common purpose. Their efforts saved us from a second Great Depression, by supporting growth, attacking sclerosis of the financial arteries, rejecting protectionism and providing resources to the International Monetary Fund. It is time to rekindle that, not only to avoid the risk of a double-dip recession, but also to put the world on the path of solid, sustained and balanced growth.” The situation today, she stated, is different from 2008; then, uncertainty came from the poor health of financial institutions. Now, it comes from doubts about the health of sovereigns and the tricky feedback loop to banks. Then the answer was unprecedented monetary accommodation, direct support for the financial sector and a dose of fiscal stimulus. Now monetary policy is more constrained, banking problems will again have to be addressed, and the crisis has left behind a legacy of public debt – about 30 percentage points of gross domestic product higher than before, on average, in advanced countries.
“So there are no easy answers. But that does not mean there are no options. For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow,” she added.
The IMF boss stated that shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs.
The new IMF boss stated in a commentary that the current market turmoil, marked by a huge spike in uncertainty, has shaken confidence across the global economy and prompted many to conclude all policy options have been exhausted. That impression is wrong – and could lead to paralysis.
Writing in the Financial Times, Lagarde pointed out that “after the crisis unfolded in late 2008, global policymakers came together to act with common purpose. Their efforts saved us from a second Great Depression, by supporting growth, attacking sclerosis of the financial arteries, rejecting protectionism and providing resources to the International Monetary Fund. It is time to rekindle that, not only to avoid the risk of a double-dip recession, but also to put the world on the path of solid, sustained and balanced growth.” The situation today, she stated, is different from 2008; then, uncertainty came from the poor health of financial institutions. Now, it comes from doubts about the health of sovereigns and the tricky feedback loop to banks. Then the answer was unprecedented monetary accommodation, direct support for the financial sector and a dose of fiscal stimulus. Now monetary policy is more constrained, banking problems will again have to be addressed, and the crisis has left behind a legacy of public debt – about 30 percentage points of gross domestic product higher than before, on average, in advanced countries.
“So there are no easy answers. But that does not mean there are no options. For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow,” she added.
The IMF boss stated that shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs.
