Cut deficits slowly, says IMF chief
Published 07/05/2012 | 21:52
The head of the International Monetary Fund has urged indebted countries in Europe and elsewhere to reduce their budget deficits only gradually to avoid further damaging their economies.
Christine Lagarde said in a speech in Zurich that steep cuts tend to slow an economy, particularly if a nation is already suffering from weak growth.
The head of the global lending organisation did not refer to any specific countries. Still, her speech came one day after voters in France and Greece rejected governments associated with cuts in social spending and other austerity steps.
Some European nations, such as Greece, have agreed to specific deficit targets as part of an international bailout partially funded by the IMF. Ms Lagarde's remarks do not affect those agreements. The appropriate path is country-specific, she said.
"Some countries under severe market pressure have no choice but to move faster," she said. "On the whole, however, adjustment should be gradual and steady."
Many European countries have been trying to reduce their debt loads as a percentage of their economies. When they have taken steps to cut deficits, such as raising taxes or cutting spending, their economies have shrunk. That makes it harder to reduce deficits as a percentage of their economy.
Ms Lagarde urged governments to avoid that trap. Instead, they should focus on gradually reducing debt levels and not cutting further if the economy weakens.
"There is no avoiding this brake of fiscal adjustment," she said in a prepared version of her remarks. "But if calibrated correctly, we can make sure it doesn't do too much harm to growth."
Spain, for example, seeks to cut its government budget deficit from 8.5% of economic output to 5.3% this year and below the European Union's goal of 3% by 2013. But many investors worry that it will not be able to do so with its economy in recession and unemployment at 24%.
The IMF last month forecast that the world economy would grow a modest 3.5% this year. It said the US economy will likely expand 2.1%. And the 17-nation euro zone is expected to slip into recession.