The debate over austerity versus growth is a false choice for policymakers, International Monetary Fund Managing Director Christine Lagarde said on Monday.
Austerity versus growth is very much the debate of the hour, Lagarde said in remarks prepared for a speech at the University of Zurich, Switzerland. I believe it is a false debate. I would argue it is not 'either/or.' Countries can choose a strategy that is good for today and good for tomorrow. Good for stability and good for growth.
The euro weakened to a more than three-month low after French Socialist Francois Hollande, who has openly challenged the austerity-focused course, was elected president of France and as Greek voters flocked to anti-bailout parties, raising concern that European governments will drop deficit-cutting plans used to combat the region's debt crisis.
Restoring solid, sustained and balanced growth is the central economic challenge facing the world today and getting there depends on choosing the right combination of policies.
Lagarde warned that with the wrong choices, we risk losing a decade of growth, a generation of young people, and an opportunity to put the global economy on a secure footing.
The IMF currently estimates global growth to be about 3.5 percent this year, while growth in advanced countries is expected to be much weaker at 1.5 percent in 2012, including a mild recession in the euro area.
Emerging markets and developing countries are holding up much better, with expected growth of 5.75 percent.
However, there are 200 million people worldwide who cannot find work, including 75 million young people. This is a potential disaster-in economic, social, and human terms, Lagarde said.
Lagarde noted that the extremely loose monetary policy would normally lead to high demand growth. But these are not normal times she said. The monetary engine cannot do the job alone. In fact, growth is being held back by three brakes in the system-fiscal adjustment, weak banks, and poor housing markets.
Among the advanced economies, the ratio of debt to GDP is expected to hit 109 percent in 2013-the largest ratio since World War II.
This has to come down, Lagarde stated. At the same time, we know that fiscal austerity holds back growth, and the effects are worse in downturns, she said. So the right pace is everything-and the right pace will be country specific.
Lagarde also called for countries to implement reforms to make product and labor markets work better, especially in the countries of southern Europe that have lost competitiveness relative to their trading partners.
Over the medium term, reforms will pay off, she said.