TOKYO — Countries should not sacrifice growth for the sake of austerity, the head of the International Monetary Fund told global financial leaders Friday, urging that government debt reduction be tempered by spending to help get the unemployed back to work.
Balancing those sometimes competing priorities is the central puzzle facing policymakers as the world economy slows further, even in dynamic Asia, IMF chief Christine Lagarde told finance leaders at the IMF and World Bank annual meeting in Tokyo.
Lagarde said she was “desperately optimistic” on prospects for a global recovery, while warning against backsliding on reforms needed to prevent future financial crises.
“The first priority, clearly, is to get beyond the crisis, and restore growth, especially to end the scourge of unemployment,” Lagarde said.
Greece, Spain and other European countries laboring under massive debts have slashed spending and raised taxes, seeking to restore confidence in their public finances and qualify for emergency financing. The economies of financially healthier European countries, such as Germany and Finland, face a potential blow to growth if those troubled economies fail to get their finances in order. At the same time, the recovery of the 17-nation grouping that uses the euro could founder if tax increases and spending cuts bite too deeply.
While there seems to be a wide consensus on long-term strategies for reform, there is less agreement on how painful such policies should be in the short term given the persistent risk of recession and surging unemployment.
“One lesson though is clear from history,” Lagarde said. “Reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth, so it's a very narrow path to be taken.”
“It's probably a long path, and one for which there is probably no shortcut, either. It's a path that needs to be taken,” she said.
Lagarde said monetary policies must encourage banks to lend, while spending cuts are adjusted to the “right pace.” Debts must be brought down in the medium term, and structural reforms are needed to sustain growth in the long term, she said.
“That's the package that is needed,” Lagarde said. “Let us not delude ourselves. Without growth, the future of the global economy is in jeopardy.”
“It's a marathon, not a sprint. It could take years,” Lagarde said in an on-camera debate hosted by the British Broadcasting Corp. where she good-naturedly traded jibes with German Finance Minister Wolfgang Schauble.
“When you are running the 42 kilometers of a marathon, you can't just stop and turn around and go the other way,” Schauble retorted, accusing those who favor going easy on debt reduction of backpedaling on their commitments.
“Increasing public debt does not enhance growth, it damages growth,” he said.