IMF, World Bank chiefs urge focus on fair growthFriday 12 October 2012 16.24
Sacrificing growth for the sake of austerity could put the entire world economy in jeopardy, the head of the International Monetary Fund told global financial leaders today.
The IMF chief called for medium-term work to bring down debt levels and urgent action to get the unemployed back to work.
In a forward-looking speech to fellow financial leaders at the IMF and World Bank annual meeting in Tokyo, IMF chief Christine Lagarde also warned against backsliding on reforms needed to prevent future financial crises.
"The first priority, clearly, is to get beyond the crisis, and restore growth, especially to end the scourge of unemployment," Lagarde said.
That requires monetary policies that encourage banks to lend, and the "right pace" of adjustments in spending. Debts must be brought down in the medium term, and structural reforms are needed to sustain growth in the long term, she said.
"That's the package that is needed," Lagarde said. "Let us not delude ourselves. Without growth, the future of the global economy is in jeopardy."
The IMF has scaled back its global growth forecast for 2012 to 3.3% from 3.5%, and has warned that even its dimmer outlook might prove too optimistic if Europe and the US fail to resolve their crises.
The fund said today that economic growth in the Asia-Pacific region slowed to 5.5% in the six months from January to June - well above the global average. But it was the lowest rate of growth for the region since the financial crisis in 2008 and largely because of sluggishness in Europe and the US. It also noted weakness in China and India, whose dynamism had helped counter weakness elsewhere.
"There are big challenges as well. We must not get carried away," she said. "The global recovery is still too weak. Job prospects for untold millions are still too scarce, and the gap between the rich and the poor is still way too big."
Europe's darkening economic outlook is drawing calls for more public support even from austerity champion Chancellor Angela Merkel, who said yesterday that it was incumbent on Germany, whose 0.3% growth in the second quarter helped offset a 0.2% contraction in the euro zone, to "do things to stimulate the European economy."
Lagarde has urged that European creditors give Greece an extra two years to meet austerity targets required to get and continue receiving loans, after nearly defaulting on its mountain of debt. While the spending cuts and tax increases are required to get its public finances in order, with unemployment at over 25%, "It's sometimes better to have a little more time," she said yesterday.
Both Lagarde and Jim Yong Kim, president of the World Bank, stressed that without greater equity and equality, growth will be unsustainable.
The turmoil of the Arab Spring protests underscores the need to ensure that growth is shared and provides jobs for young workers and women, Kim said.
The gathering of top financial leaders in Tokyo, the first in nearly a half-century, has highlighted Japan's own struggle to escape two decades of economic malaise and grapple with its own huge debt burdens. It also has drawn praise for Japan's keenness to share lessons learned in rebuilding from its March 2011 earthquake, tsunami and nuclear disasters.
Finance ministers and central bankers from the Group of Seven richest nations met yesterday to discuss the European debt crisis and the looming budget impasse in the US.
Reports said Japan sought support for its own woes with the stubborn appreciation of the Japanese yen, which by making its exports more expensive in overseas market is hindering its own recovery.
The leaders released no communique, though Japan's Ministry of Finance announced that the group had supported moves to resolve debts and move ahead on new financing for Myanmar as it carries out sweeping economic reforms.
US Treasury Secretary Timothy Geithner sought to strike a reassuring tone regarding the threat of the so-called "fiscal cliff" of tax increases and deep spending cuts that will take effect in 2013 unless Congress and the Obama administration resolve a budget impasse.
The Obama administration intends to try to fix the problem before the end of the year, he said. "We're going to take a run at it," Geithner said.
Such moves would be a first step toward longer-term reforms needed to make growth sustainable in the long run, Lagarde said, noting that debt levels averaging over 100% in the advanced economies are at "pretty much wartime levels." "This leaves governments highly exposed to subtle shifts in confidence," she said.
Planners must balance growth with debt reduction as they work to reform flawed financial markets and institutions.
Lagarde warned against waning momentum for reforms, noting delays in improving regulation of derivatives and shadow banking, and emphasizing the urgency for reducing debts once growth is restored.
"One lesson though is clear from history," she said. "Reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth, so it's a very narrow path to be taken. It's probably a long path, and one for which there is probably no shortcut, either. It's a path that needs to be taken," she said.