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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