The Fiscal Milestone: Achievements, Fatigue, and Prospects


Fiscal Monitor

By Carlo Cottarelli

(Versions in عربي 中文, 日本語, and Español)

The 2008–09 global economic crisis pushed public debt ratios of advanced economies to levels never seen before during peacetime. These high debt levels expose countries to a loss of market confidence and, ultimately, damage long-term growth prospects.  Since 2010 advanced economies have been on a journey: the goal is to bring their public finances back to safer territory. They are in it for the long haul, not a sprint, and, as a redress of the large fiscal imbalances created by the crisis, without derailing the still fragile economic recovery, it requires a steady and gradual pace of adjustment—at least for countries not subject to market pressures.

This year we see the process of gradual fiscal adjustment reaching two symbolic milestones. First, the average deficit of advanced economies as a share of GDP will fall to half of its 2009 level at the peak of the crisis. Second, the average debt ratio will stop rising, after increasing steadily since 2007. Indeed, it will actually decline slightly.

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Taking Stock: Public Finances Now Stronger in Many Countries


By Carlo Cottarelli

(Versions in  عربي, 中文EspañolFrançaisРусский日本語)

The slow global recovery is making fiscal adjustment more difficult around the world, but this doesn’t mean that little has been accomplished.

In fact, significant progress in many countries has been made during the past two years in strengthening their fiscal accounts after the 2008–09 deterioration.  The IMF’s latest Fiscal Monitor takes stock of this progress.

Deficits are lower, and in many cases debt is too

Let me first say something about advanced economies, which is where the most urgent fiscal problems exist.

Most advanced economies have made good progress lowering their fiscal deficits (the imbalance between spending and revenues). Deficits, adjusted for the economic cycle, fell by about ¾ of a percentage point of GDP in 2011 and 2012, and are projected to do so by about 1 percentage point of GDP in 2013.

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Tokyo links — IMF-World Bank Annual Meetings


The 2012 annual meetings of the IMF and the World Bank are being held this year in Tokyo at a crucial time for the world economy. Track everything through the live events schedule  (all Tokyo times).

Key reports out this week are

banner in Tokyo

Stay up-to-date through timely reports from IMF Survey online, through iMFdirect blog, World Bank Voices, and through regular video briefings and YouTube.  Also track news and commentary through Google +.

Extensive Japanese  (日本語) language content and updates are also available.

The Meetings bring together more than 10,000 central bankers, ministers of finance and development, private sector executives, academics, and journalists to discuss global economic issues and the interconnected world.

Making Goldilocks Happy


By Carlo Cottarelli

When it comes to adjusting public spending, getting the balance right is important. Fiscal adjustment is taking place in economies around the world, but risks remain high. Bringing debt and deficits down to more moderate levels is important to easing risks.

From one perspective, the sooner this happens, the better.

But, slashing budgets too abruptly can impede the overall economic recovery. And if the recovery stalls, debt and deficits will rise, and so will unemployment.

According to our analysis, what is needed is a steady but gradual adjustment. So, as we’ve been saying at the IMF for a while now, the pace of adjustment needs to be appropriate—not too fast, not too slow, but just right, for countries where financing conditions allow.

Improving picture

Compared to six months ago, there has been some decline in risks. This is primarily because of progress in policy implementation, with progress being made particularly in Europe.

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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

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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