IMF, World Bank chiefs urge work on sustainable growth

A reduction in debt need over the medium term.

October 12, 2012   by ASSOCIATED PRESS

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 Oct. 12, 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% from 3.5%, and has warned that even its dimmer outlook might prove too optimistic if Europe and the United States fail to resolve their crises.

The fund said economic growth in the Asia-Pacific region slowed to 5.5% 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 US. It also noted weakness in China and India, whose dynamism had helped counter weakness elsewhere.

Europe’s darkening economic outlook is drawing calls for more public support even from austerity champion Chancellor Angela Merkel, who said it was incumbent on Germany, whose 0.3% growth in the second quarter helped offset a 0.2% contraction in the 17-nation euro zone, to “do things to stimulate the European economy.”

Lagarde has urged that European creditors give Greece, where unemployment is 25%, an extra two years to meet austerity targets required to get and continue receiving loans, after nearly defaulting on its mountain of debt.

Both Lagarde and Jim Yong Kim, president of the World Bank, stressed that without greater equity and equality, growth will be unsustainable.

Finance ministers and central bankers from the Group of Seven richest nations met to discuss the European debt crisis and the looming budget impasse in the US. 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.

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.

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.

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