January 20, 2012

Lagarde Warns of Dangers of Cuts Before Davos

Fiscal consolidation should be managed to promote growth

Ahead of the meeting of policymakers in Davos, Switzerland, next week, Christine Lagarde, managing director of the International Monetary Fund joined with members of the Global Issues Group of the World Economic Forum to warn against policies that aim only for cuts and jeopardize chances for economic growth.

Bloomberg reported that Lagarde and members of the group said in a statement, “The world faces significant and urgent challenges that weigh heavily on prospects for future growth. We worry about decelerating global growth and rising uncertainty, high unemployment” and a possible move toward protectionist policies.

The group, whose members also include Robert Zoellick, president of the World Bank, Pascal Lamy, director general of the World Trade Organization and eight other major bodies, also voiced other concerns. It warned that as governments fight contagion and work to bring back confidence in financial institutions, they need to handle fiscal consolidation in such a way that it promotes growth rather than hinders it.

The World Economic Forum meeting begins Jan. 25, with policymakers and business leaders coming together in an economic climate that leans toward recession and threatens emerging markets as well. Lagarde and the rest of the Global Issues Group spoke of the European Central Bank as a major tool in fighting the debt crisis.

In its statement, the group said, “Different options are being considered for stemming contagion in the euro area. They have involved greater recourse to the European Central Bank’s balance sheet and require a strengthening of the European Financial Stability Fund. Governance reforms are needed to offset the risk of moral hazard involved in short-term support packages and to ensure longer-term fiscal discipline.”

The ECB has loaned a record amount of money to eurozone banks in the hope of restoring liquidity. However, those banks in turn have not loaned it out, but rather have redeposited it with the ECB.

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