Beyond the Austerity Debate: the Deficit Bias in the post-Bretton Woods Era


By Carlo Cottarelli

(Version in Español)

The austerity vs. growth debate has raged in recent months, pitting those who argue that fiscal policy should be tightened more aggressively now to bring down high levels of debt, even though economic growth remains weak, against those who want to postpone the adjustment to better times. This is a critical issue for policymakers, perhaps the most important one in the short run.

And yet, this debate—which, mea culpa, I have myself contributed to―is attracting too much attention.

This is bad for two reasons:

  • The debate is driven, to some degree, by ideology and is therefore more focused on the relatively limited areas of disagreement than on the far broader areas of agreement. Most economists would agree that fiscal consolidation is needed in advanced economies, and that the average annual pace of adjustment during 2011-12―about 1 percentage point―is neither too aggressive nor excessively slow. Most economists would also agree that countries under pressure from markets have to adjust at a faster pace, while those that do not face such constraints have more time. Of course, there is disagreement on some aspects of the fiscal strategy, but it relates to specific country cases.
  • The debate is detracting attention from policy issues that may seem less urgent, but which are nevertheless critical in the medium term. I am referring to what I would call the institutional gaps in fiscal policymaking that still exist in most advanced and emerging economies. These gaps have contributed to a bias in the conduct of fiscal policy in favor of deficits that is behind many of the current problems.

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How to Get the Balance Right: Fiscal Policy At a Time of Crisis


By Anders Borg and Christine Lagarde

Last autumn was a turbulent time for Europe. The debt crisis deepened and financial markets became embroiled in turmoil, driven by fears of widespread restructuring of public debt. The crisis has harmed growth, increased unemployment, and left a large number of people less protected.

We are now seeing some signs of stabilization. Most countries are reducing their deficits and even if debt ratios are still rising, the return back to fiscal health has begun.

The International Monetary Fund and the Swedish Ministry of Finance are hosting an international conference in Stockholm on May 7-8, with the purpose of sharing knowledge and providing guidance on the best way to achieve fiscal consolidation, and on the role that effective fiscal policy frameworks and institutions can play in this endeavor.

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The Impact of the Gloomier Global Outlook on Latin America


By Nicolás Eyzaguirre

(Version in Español)

The IMF has sharply marked down its forecast for world growth and it now expects a mild recession in the euro area. Naturally, weaker world growth will affect economic activity in Latin America and the Caribbean.

Concretely, the Fund expects the world economy to grow by just 3¼ percent in 2012, ¾ percentage points lower than our September forecasts.

In contrast, our forecast for the U.S. economy for 2012 is unchanged, as incoming data signal a stronger—but still sluggish—domestic recovery that will offset a weaker global environment. Commodity prices will be affected by ebbing global demand, with oil projected to fall about 5 percent and non-oil commodities about 14 percent.

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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 Iceland Recovered from its Near-Death Experience


 By Poul M. Thomsen

(Versions in Español and Français)

When I traveled to Reykjavik in October 2008 to offer the IMF’s assistance, the situation there was critical. The country’s three main banks—which made up almost the entire financial system—had just collapsed within a week of each other. The sense of fear and shock were palpable—few, if any, countries had ever experienced such a catastrophic economic crash.

There was a lot of concern that a disorderly depreciation of the exchange rate would be ruinous for households and companies if nothing was done or that deposit runs would cripple what was left of the financial system. The scale of the uncertainty was staggering―the three banks had assets worth more than 1,000 percent of GDP, and no one knew at that point how large the losses would turn out to be and how they would be divided between Icelanders and foreigners.

Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Continue reading

Fiscal Glass is Half Full: Some Reasons for Optimism


By Carlo Cottarelli

(Versions in عربيFrançais中文 and  Русский)

In the midst of jittery financial markets, and global economic doom and gloom, it’s easy to become pessimistic. Perhaps too much so; amid what seems like a steady drum beat of bad news, one can lose sight of what has been  achieved over the last couple of years.

Public debt and fiscal deficits in many advanced economies remain very high. Nevertheless, important progress has been made in fiscal adjustment in many advanced economies. For most countries, government deficits have fallen substantially—by 2¼ percentage points of GDP on average compared to two years ago.


The fiscal outlook in most countries is stronger than we expected two years ago. Continue reading

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