Austerity should not be done too fast: IMF

Wed Dec 14, 2011 12:13pm EST
 
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NEW YORK (Reuters) - The International Monetary Fund's chief economist cautioned on Wednesday against imposing tough austerity measures too quickly and instead favors a longer process as countries around the world grapple with high debt levels.

The IMF's Olivier Blanchard said he was surprised over the debate over whether the best way forward was more stimulus to boost economic growth or tighter measures to deal with deficits, saying in most circumstances austerity would lead to contraction.

"The hope that fiscal consolidation will make people optimistic about the future and lead to a boom in the economy next year I think is something we should give up," said Blanchard, speaking on a panel at the Council on Foreign Relations in New York.

Blanchard noted that there are some dire situations that have been improved by greater government responsibility, but the United States and most of Europe are not in such bad shape as to warrant that.

"It seems to me everybody should agree that the fiscal adjustment should be a long, drawn out, credible, medium-term process," said Blanchard, who also said austerity was clearly needed.

He said he was worried that governments feel pressure to satisfy markets through very strong and very fast fiscal consolidation.

The debate over whether economic policy should focus on spending more or spending less has been a heated one, particularly in the United States ahead of next year's presidential elections.

Wrangling over the budget has seen U.S. lawmakers gridlocked this year and the latest issue being debated is whether to extend a payroll tax cut and unemployment benefits that are set to expire at the end of the year.

Asked about the debt crisis in the euro zone, Blanchard said that if Europe does not contain its short-run crisis, clearly the world will be affected in major ways.   Continued...