TOKYO — 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 Friday, calling 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 percent from 3.5 percent, and has warned
that even its dimmer outlook might prove too optimistic if Europe and the
United States fail to resolve their crises.
On Friday, the fund said economic
growth in the Asia-Pacific region slowed to 5.5 percent in January-June — well
above the global average, but the lowest for the region since the financial
crisis in 2008 — largely because of sluggishness in Europe and the U.S. 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 Thursday it was incumbent on Germany, whose
0.3 percent growth in the second quarter helped offset a 0.2 percent
contraction in the 17-nation eurozone, 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 percent, “It’s sometimes better to have a little more time,” she
said Thursday.
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 Thursday to discuss the
European debt crisis and the looming budget impasse in the U.S. Local 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.
U.S. 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.
Geithner said, “We’re going to
take a run at it.”
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 percent 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.
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