The managing director of the International Monetary Fund, Christine Lagarde, in a speech today said that the two prevailing views of how to repair the faltering global economy is neither to adopt a policy of austerity nor to promote more government stimulus. Calling the dichotomy a “false debate,” Lagarde claims, “Countries can choose a strategy that is good for today and good for tomorrow. Good for stability and good for growth.”
Calling the current level of global unemployment a “potential disaster — in economic, social, and human terms,” Lagarde said “the right pace is everything — and the right pace will be country specific.”
But weekend elections in France and Greece could indicate that austerity is losing its lustre, at least among voters. Fiscal restraint at the expense of jobs is no longer popular — if it ever was. Spain and Italy are relaxing their deficit-reduction targets and the Dutch government got tossed last week because it tried to adopt deeper cuts.
Lagarde is trying to encourage Greece, especially, to honor its previously adopted austerity measures. In exchange, she wants the richer nations of the Eurozone, particularly Germany and the European Central Bank, to back off the commitment to an inflation target of around 2%. She said:
Countries need to keep a steady hand on the wheel. This means that if growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets. In other words, they should not fight any fall in tax revenues or rise in spending that comes about solely because the economy weakens.
Her goal is to restore economic growth at the same time that she encourages fiscal restraint. Her approach may be Solomon-like, but achieving the same result is hardly a given.