Fiscal Adjustment: Too Much of a Good Thing?


By Carlo Cottarelli

(Versions in  عربي中文EspañolFrançais, Русский, 日本語)

The IMF has argued for some time that the very high public debt ratios in many advanced economies should be brought down to safer levels through a gradual and steady process. Doing either too little or too much both involve risks: not enough fiscal adjustment could lead to a loss of market confidence and a fiscal crisis, potentially killing growth; but too much adjustment will hurt growth directly.

At times over the last couple of years we called on countries to step up the pace of adjustment when we thought they were moving too slowly.

Instead, in the current environment, I worry that some might be going too fast.

Risk to recovery

The latest update of the Fiscal Monitor shows that fiscal adjustment is proceeding pretty quickly in the advanced economies—on average the deficit is projected to fall by a total of 2 percentage points of GDP in 2011-12. The decline is even larger in the euro area—about 3 percentage points of GDP. In a reasonably good growth environment this pace of adjustment would be fine. But in the current weaker macroeconomic environment bringing deficits down this quickly could pose a risk for the economic recovery. Continue reading

Lagarde in Davos: How to Avoid an Economic Deep Freeze


By iMFdirect

Amid the heaviest snowfall in Davos for decades, IMF chief Christine Lagarde has been making her case for urgent action to resolve the eurozone crisis, which is at the center of current global economic concerns. The Fund recently sharply revised downward its forecast for global economic growth and in a speech in Berlin Lagarde mapped a way forward.

Policy priorities

Lagarde has taken her messages to the Alpine resort in Switzerland, where global leaders are gathered for the 42nd Annual Meeting of the World Economic Forum. At the top of the agenda is the need to find and implement the policy solutions to avoid a downward economic spiral—or what Lagarde as has called a “1930s moment.” She set out some of the policy priorities in a video interview and stressed the need for policy action to be “coordinated, cooperative and comprehensive”. The main goal is to get growth going again “because that’s most needed. There is too much unemployment around the world,” Lagarde said. Continue reading

How to Exit the Danger Zone: IMF Update on Global Financial Stability


By José Viñals

(Versions in  عربي, 中文, EspañolFrançaisРусский日本語)

Since September of last year, risks to global financial stability have deepened, notably in the euro area.

However, over the past few weeks, markets have been encouraged by measures to provide liquidity to banks and sovereigns in the euro area. This recent improvement should not be taken for granted, as some sovereign debt markets remain under stress, and as bank funding markets are on life support from the European Central Bank (ECB).

Main sources of risk

Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.

Despite the recent improvements, sovereign financing stress has increased for many countries—with almost two-thirds of outstanding euro area bonds at spreads in excess of 150 basis points—and financing prospects are challenging. Markets remain very volatile and long-term foreign investors have sharply reduced their exposure to a number of euro area debt markets, including some in the core. Keeping these investors involved is essential to stabilizing markets.

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Driving the Global Economy with the Brakes On


By Olivier Blanchard

(Versions in  عربي中文EspañolFrançaisРусский日本語)

After the speech by the IMF’s Managing Director in Berlin yesterday, my main messages on the global outlook will not surprise you.

Starting with the bad news–the world recovery, which was weak in the first place, is in danger of stalling. The epicenter of the danger is Europe, but the rest of the world is increasingly affected.

There is an even greater danger, namely that the European crisis intensifies. In this case, the world could be plunged into another recession.

Turning to the good news–with the right set of measures, the worst can definitely be avoided, and the recovery can be put back on track. These measures can be taken, need to be taken, and need to be taken urgently.

And now the numbers, starting at the epicenter:

The IMF’s forecast for growth in Euro Area for 2012 is ‑0.5 percent—this marks a decrease of 1.6 percentage points relative to our September 2011 projection. In particular, we predict negative growth in Italy (‑2.2 percent) and Spain (‑1.7 percent).

We have also revised downwards our forecasts for other advanced countries, although by less. Only for the United States, is our forecast unchanged at 1.8 percent.

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Meeting the Employment Challenge in the GCC


By Masood Ahmed

(Version in عربي)

The issue of how to create more jobs is high on the minds of policymakers everywhere. The economies of the six Gulf Cooperation Council (GCC) countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—are no exception.

By many measures, these economies are doing very well. Abundant oil and gas reserves are producing large budget and external surpluses, growth is up, and considerable strides have been made on social indicators.

Yet, economic activity is dominated by the oil/gas sector and—given that many GCC countries have proven reserves of at least another 50–100 years at current rates of production—will remain so. However, that sector creates relatively few jobs directly—it employs less than 3 percent of the region’s labor force.

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Remembering Michael Mussa


Sad to hear about the death of Michael Mussa, the IMF’s witty and trenchant former chief economist for nearly a decade, who resigned in 2001. He was 67.

Christine Lagarde, Managing Director of the IMF,  made the following statement.

The Wall Street Journal says the former Chicago University professor did not shy away from controversy. The Washington Post said he helped shape the IMF’s responses to financial crises in the 1990s. Later, as a senior fellow at the Peterson Institute, Mussa was well known for his semiannual forecasts of global economic growth, conveyed with tough assessments, clarity of expression, and biting wit. Paul Krugman said his most influential work was on currency regimes.

The IMF’s Research Department organized a conference in his honor called “MussaFest” to mark his 60th birthday in 2004.

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Sins of Emission and Omission in Durban


By Ian Parry

(Versions in  عربي, 中文, Español and Français)

As we slide into another year of tough economic times, it’s easy to understand why policymakers are preoccupied with the next few weeks. But they also need to be thinking about the longer term issue of leaving the planet in reasonable shape for future generations.

Without serious efforts to reduce greenhouse gases, scientists predict that by the end of this century global temperatures could be 2.5 to 6.0OC higher than a couple of hundred years ago. That could mean more heatwaves, more droughts, higher sea levels, more violent storms—and so on. When you start to think about the potential impact of, say, droughts on the livelihood of farmers, especially in poorer countries… well, you get the point.

While some progress was made in the latest round of United Nations’ climate change negotiations in Durban, South Africa, we saw two major omissions. There was little progress on either carbon pricing or, related, financing for action against climate change. And there was not enough recognition of what economics has to offer to help tackle the problems.

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