Austerity versus growth version 3.0 at G20/IMF

Sun Oct 5, 2014 6:23am EDT
 
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By Mike Peacock

LONDON (Reuters) - World policymakers gather in Washington later this week to ponder how to sustain economic recovery at a time when the United States is about to turn off its money taps.

Given the same G20 finance ministers and central bankers met in Australia only two weeks ago it is not hard to guess how the debate will go: most of the western world will urge the euro zone to do more to foster growth and Germany will warn against letting up on austerity.

That debate has circled within the G20 for three years and is fizzing now in Europe with France, Italy and others pressing for a loosening of fiscal strait-jackets to allow time for economic reforms in defiance of Berlin's wishes.

"Existing flexibility within the rules should allow governments to address the budgetary costs of major structural reforms, to support demand and to achieve a more growth-friendly composition of fiscal policies," European Central Bank President Mario Draghi said on Thursday after a monthly policy meeting.

The Federal Reserve will end its program of bond-buying with new money later this month, a prospect that has already driven the dollar higher and created jitters about a reversal of money flows out of emerging markets back into the United States.

The euro zone in the guise of the ECB has been doing its best to come up with new stimulus, though it has shied away from full quantitative easing so far.

Its most effective card may be euro weakness, the flipside of dollar strength.

The euro is down almost 10 percent from a peak against the dollar in May. With U.S. money printing about to end and speculation about the timing of a first interest rate rise, there are good reasons to think this trend could continue.   Continued...

 
International Monetary Fund (IMF) Director Christine Lagarde delivers her speech on the global economy ahead of the fall meetings of the IMF and World Bank at Georgetown University in Washington October 2, 2014.    REUTERS/Gary Cameron