David Lipton, No. 2 at the International Monetary Fund, is in
London Monday, casting an eye across the British Channel at the
Continent and warning that too much deleveraging too fast in too
many countries at the same time is a really bad idea. But putting
off decisions about "fiscal consolidation," as the IMF puts it, in
the advanced economies of U.S., Europe and Japan is a bad idea,
too, he said.
That's not exactly how Mr. Lipton, a former Clinton and Obama
administration official, put it in his speech to the Royal
Institute of International Affairs at Chatham House. But the
message came through in what amounts to a 2,000-word recipe for
restoring global growth, one-stop shopping for those who are
looking for some way out of today's global economic morass.
The leaders of the world economy agreed in the spring of 2009 to
aim at two objectives: end the financial crisis and make sure it
doesn't happen again. The first calls for strong enough demand to
get rid of unemployment. The second requires deleveraging, the
paying down of debt, which, he said, "will damp demand,
particularly if it happens simultaneously in many sectors in many
countries."
If only one country or region were deleveraging, the rest of the
world could pick up the slack. "But in the current setting, where
so many countries find themselves facing similar circumstances,
what we have seen is that fiscal consolidation alongside private
sector deleveraging, has dampened demand, and the near-term effect
on activity has been larger than anticipated in several
countries."
The resolution of the conundrum is easy to state, hard to
execute. Here's the Lipton recipe: "Policymakers need the right
pace of consolidation in the short term, effective and credible
commitments over the medium term time frame, and a willingness to
adjust as needed along the way. Deleveraging is necessary, but it
should be implemented at a speed and in a way that minimizes the
impact on growth." (Are you listening Mrs. Merkel?)
Once upon a time the IMF's fixation on reducing government
deficits in any and all circumstances was caricatured as "It's
Mostly Fiscal." Those days are gone. "Where financing conditions
permit, fiscal consolidation should be gradual and sustained,
guided by structural targets. In case of large negative shocks or
growth disappointments, the pace of consolidation should be
smoothed in countries that can afford it." (Again, are you
listening Mrs. Merkel?)
Deficit reduction, he added, "must be anchored by concrete and
ambitious medium-term consolidation plans," but the "adjustment be
of quality and as growth-friendly as possible." (Yes, Washington,
that means you, too.) "Access to funding at reasonable costs is
essential to allow European periphery economies to adjust, as well
as facilitate balance sheet repair and support growth," he added.
(That would mean Greece and Spain.)
A lot of deficit reduction has been achieved already, Mr. Lipton
noted. But the advanced economies "still have a long way to
go."
"The U.S.," he said, "lacks agreement on a concrete and
ambitious medium-term fiscal consolidation plan, and Japan's plan
needs to be strengthened further despite the recent welcome
approval of a timetable for doubling the consumption tax rate." And
the U.S., Europe and Japan all need "to move early to reduce the
growth of aging-related expenditures," particularly health care, he
said.
For the good of the world economy, economies that are running
big trade deficits with the rest of the world (like the U.S.) "need
to continue their fiscal consolidation and private sector
deleveraging in a sustainable way" while pursuing
reforms--particularly in Europe--that increase productivity and
competitiveness. At the same time, he said, advanced economies that
are running surpluses with the rest of the world (like Germany)
need to boost investment while emerging markets (like China) with
big surpluses need to broaden their safety nets, stop accumulating
foreign reserves and make their currencies more flexible.
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