IMF Managing Director, Christine Lagarde, adds her views to the current market turmoil. Confidence has been shaken across the global economy and prompted many to conclude that all policy options have been exhausted. That impression is wrong – and could lead to paralysis.
The situation today 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.
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. By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation.
Debt-reduction strategies must be based on concrete and substantive commitments – not just words – but the impact on the economy can be set with a delay. Policy actions can focus on areas where the pressure is mounting tomorrow, but have little effect on demand today – such as reforming entitlements or restructuring the tax system. At the same time, short-term measures must be supportive of growth, yet economical in terms of the impact on fiscal sustainability, and can include policies supporting employment creation, advancing planned infrastructure and easing adjustment in housing markets.
Of course, there is more to do than untangle the fiscal consolidation conundrum, including getting monetary policy right – interest rates should remain low in most advanced economies, and central banks in core economies should stand ready to dive once more into unconventional waters should the need arise.
The priorities are clear: credible, medium-term fiscal consolidation, combined with aggressive exploration of all possible measures that could be effective in supporting short-term growth. If the global recovery falters, the burden will be borne far and wide. If policymakers can act boldly, act together and act now on these priorities, confidence can be restored and the recovery sustained.
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