Christine Lagarde, the International Monetary Fund’s new managing director, urged policy makers to include measures to support economic growth in the short term as they implement fiscal tightening plans under market pressure.
“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans,” Lagarde wrote in the Financial Times. “At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects.”
Central bankers are racing to shield their economies from fiscal tightening and lopsided currency swings that threaten a new global recession. The European debt crisis has shown no sign of abating with investors’ concerns rattling France last week and the European Central Bank starting to buy Spanish and Italian debt.
“Fiscal adjustment must resolve the conundrum of being neither too fast nor too slow,” Lagarde wrote. “What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs.”
While not all countries have enough leeway to implement policies to support growth, in “many” others, sharp deficit reduction “would be wrong,” she wrote. Potential measures to support growth include policies to advance planned infrastructure or to support job creation, Lagarde wrote in the FT. Cutting revenue alone won’t be enough, revenues must increase too, Lagarde wrote.
Low interest rates, central banks’ readiness to “dive once more into unconventional waters” if required, as well as financial industry repairs, are also required to ensure global recovery doesn’t falter, she wrote.
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