IMF Urges Europe to Back Off on Austerity

By Philip Aldrick, Telegraph UK

12 October 12

Christine Lagarde has called for decisive action from world leaders to end uncertainties in the global economy that are prolonging "terrifying and unacceptable" levels of unemployment.

ounding on Europe and the US in particular, the managing director of the International Monetary Fund said this week's annual meetings in Tokyo needed to be marked by "courageous action on behalf of our members".

Speaking just days after the IMF slashed its global growth forecasts for both this year and next, Ms Lagarde said the economic weakness was not just a result of "tail risks" such as a eurozone break-up but "the degree of uncertainty in many corners of the world – whether it is Europe or America".

"It is deterring investors from investing and creating jobs," she said. "We need action to lift the veil of uncertainty."

She also reiterated the softening of the IMF's position on austerity, saying that governments should no longer pursue specific debt reduction targets but focus on implementing reforms.

If borrowing rises as a direct result of growth-sapping measures, the IMF now thinks it should be tolerated rather than addressed with even more tax rises or spending cuts. "We don't think it's sensible to stick to nominal targets. We think it's much more sensible to apply measures and let the stabilisers operate," she said.

Her comments will give George Osborne breathing space over his own debt reduction goal, which most economists now reckon the Government's independent forecaster will in December judge that he is on course to miss.

Unsurprisingly, she said the most urgent action is needed in Europe, saying the eurozone remained "the epicentre" of the global crisis.

However, she added that "fiscal risks are becoming more threatening" in the US, where the scheduled withdrawal of tax cuts in January threatens to squeeze the world's largest economy and further erode global growth.

She applauded efforts to stimulate growth taken by central banks, including the Bank of England, but warned that they were just buying time for fiscal reforms and "in and of [themselves] will not be sufficient".

Action should be focused on four key areas; completing stalled financial sector reforms, establishing "credible medium term strategies" to deal with government debts, supporting job-rich growth "as unemployment levels are terrifying and unacceptable", and facing up to "the fundamental issues of global imbalances".

To succeed, countries will need to work together. "It is not a competitive race, it is a co-operative effort," she said.

She regretted the decision by the Chinese delegation not to send to the meetings its two most senior officials, who have apparently boycotted them in protest over a territorial dispute with Japan about a chain of small islands.

"They lose out by not attending the meeting. We hope differences can be resolved harmoniously," she said, adding that China should "be a partner in the global economy – fully fledged".