Lagarde warns about the dangers of overemphasizing deficit reduction.
WASHINGTON — The head of the International Monetary Fund says the US, Europe, Japan and China all need to make adjustments to their current economic policies in order to boost a still-struggling global economy.
IMF Managing Director Christine Lagarde says the US and many countries in Europe need to focus more on growth and less on trimming budget balances this year. She said there was a critical need for policies focused on spurring jobs. Lagarde told a news conference that “we need growth, first and foremost.”
Lagarde spoke to reporters to preview upcoming discussions among finance ministers and central bank governors of the world’s 20 major economies plus the spring meetings of the 188-nation IMF and its sister lending institution, the World Bank.
The IMF lowered its outlook for the world economy this year, predicting that government spending cuts would slow US growth and keep the 17-nation area that uses the euro currency in recession.
Officials of the Group of 20, among them Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, were scheduled to wrap up discussions a joint communique. The G-20 is composed of the world’s major developed countries such as the US, Japan and Germany and fast-growing developing nations including China, Brazil and India.
That joint statement was expected to repeat a pledge the group made at their last meeting in February that they would avoid using competitive currency devaluations to gain advantages in trade.
Lew, previewing the US objectives going into the meetings, said that he would press Europe to do more to support growth and would maintain pressure on Japan and China to avoid lowering the value of their currencies to boost their exports at the expense of the US and other countries.
Lew said it was important that G-20 nations “avoid a downward spiral of ‘beggar thy neighbour’ policies,” the type of destructive trade competition that worsened the Great Depression in the 1930s.
Lew held a series of one-on-one meetings with finance officials on April 18 including a discussion with Japanese Finance Minister Taro Aso. In addition to reaffirming commitments the two nations have made on currency policies, Lew and Aso discussed the importance of the actions both nations have taken to isolate North Korea from the international finance system, the Treasury Department said in a statement after the meeting.
In recent weeks, North Korea has threatened to attack the US and South Korea over the sanctions imposed for its February nuclear test. South Korean officials have said the North is poised to test-fire a medium-range missile capable of reaching the American territory of Guam.
In her comments, Lagarde talked about the dangers of overemphasizing deficit reduction with growth still fragile. She said the US had avoided the “fiscal cliff” of across-the-board tax hikes and spending cuts at the beginning of this year that could have derailed the US economy but had made a policy error by allowing $85 billion in across-the-board spending cuts, known as a sequester, to take effect on March 1.
Lagarde said the US needed to pursue “better quality” deficit reductions with less impact coming in the near-term.
She said that a priority for Europe was “to fix its frayed banking system” and also where needed to moderate its austerity programs. Lagarde noted that Spain was struggling with high unemployment and therefore the country needed more time before pursuing aggressive deficit reduction.
The IMF’s economic report called on both the US and Britain to scale back its deficit cutting in the near-term. The austerity program launched by Britain in 2010 was designed to reduce high budget deficits through tax increases and spending cuts but ended up weakening Britain’s recovery from the recession.
Lagarde was asked whether the IMF had given conflicting advice to countries such as Britain by first praising the austerity programs and then contending they were too stringent.
She said the IMF had always cautioned that if economic growth started to falter, then a country needed to moderate its deficit-cutting programs. “We very much stand by that” advice, she told reporters.
Eric LeCompte, executive director of Jubilee USA, an anti-poverty group, however, said that the IMF’s reduced economic forecast demonstrated “a kind of schizophrenia at the IMF” in which growth has been hurt “due to the austerity policies the IMF previously promoted.”
In Europe, countries are split over how much budget austerity to pursue, with some nations resisting Germany’s push for a strong emphasis on deficit reduction.
Referring to disagreements over the issue, French Finance Minister Pierre Moscovici said his government had chosen “to keep open the engine of growth.” He said, “Germany understands that as prosperous as it is, as strong as it is, it also needs a strong France.”
At a separate Washington news conference, World Bank President Jim Yong Kim said his institution welcomes creation of a new development bank being started by five of the world’s emerging economic powers because new sources of capital are critically needed to meet the world’s need to build new roads, dams and other infrastructure projects.
The leaders of Brazil, Russia, India, China and South Africa announced last month that they will create a development bank to help fund $4.5 trillion in infrastructure projects. The announcement was seen as a direct challenge to the World Bank, which has been accused by the developing world of having a Western bias.