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Global economic recovery needs more firepower

IMF managing director calls on the international community to keep troubled economies from going under.


April 4, 2012
by The Canadian Press

WASHINGTON: The managing director of the International Monetary Fund says the global recovery is growing stronger but still is very fragile, calling on the international community to give her organization “more firepower” to help keep tottering economies from going under.

“We certainly need more resources,” says Christine Lagarde.

The IMF has about $400 billion in resources it can use to provide loans to countries in trouble. Lagarde has talked about expanding those resources to close to $1 trillion. The 17 countries that use the euro have already promised to provide $200 of that amount.

Lagarde said the global economy is making some advances in digging itself out of the worst downturn in decades, but that the recovery remains particularly frail in Europe. She suggested cutting government spending too quickly in developed countries like the US and larger European nations could make things worse, not better.

Policymakers on both sides of the Atlantic need “breathing space to finish the job,” she says. Europe’s faltering would quickly spread and the U.S. recovery, slowly gaining strength, “might well be in jeopardy,” she adds.

“America has a large stake in how Europe and the rest of the world fares.”

The IMF official says it is important to continue and expand emergency programs among the 17 countries that use the euro to help heavily indebted countries there.

“We should not delude ourselves into a false sense of security,” she said. “The recovery is still very fragile. The financial system in Europe is still under heavy strain. Debt is still too high, public and private. Stubbornly high unemployment is straining the seams of society. ….Rising oil prices are clearly another cloud on the horizon.”

Lagarde’s remarks came after the Eurozone countries on Friday boosted their emergency bailout funds for heavily indebted countries to $1.1 trillion (800 billion euros). That was short of the $1.3 trillion (1 trillion euros) that Lagarde and other international leaders have said is needed to calm financial markets.

She says that since the Europeans have moved first to raise their firewall, “the time has come to increase our firepower.” While short of what the IMF had hoped for, it was a good first step—and something she says the IMF could work with.

Lagarde also suggests bold steps are necessary, such as those taken by the US Federal Reserve and the European Central Bank to help “keep growth strong and steady.”

And while “some countries under pressure have no choice but to cut deficits today…a global undifferentiated rush to austerity will prove self-defeating. Countries like the United States with low costs of borrowing should not move too quickly.”

Those remarks thrust her into the US presidential debate, where Republicans are united in calling for deep cuts in federal spending, while President Barack Obama and congressional Democrats are calling for more job-creating spending, along with raising taxes on the wealthy to help trim budget deficits now exceeding $1 trillion a year.

©The Canadian Press