Financial Stability News

News about financial stability and central banking

IMF calls for fiscal austerity and lower real wages

This recent speech from IMF Managing Director Lagarde confirms the austerity for growth paradigm that has taken hold recently. She notes that to get growth

The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment sooner.

The current reduction of budget deficits with about 1 % of GDP on average is at a “prudent pace”, according to Lagarde.

As for the southern European countries that has lost competitiveness, the choice is between increased productivity or lower wages. But since labor market reform takes time, “wage will have to adjust” (read: fall).

It is remarkable how the IMF has changed since Mr. Strauss Kahn provide strong leadership out of the 2008 financial crisis. I just quote from one of his many press releases, this one from November 15, 2008 commenting on the G-20 Action Plan:

Mr. Strauss-Kahn noted the G-20 leaders’ commitment to act together to meet global macroeconomic challenges, using both monetary and fiscal policy. Lower inflation risks provide room to ease monetary policy, he said, adding that this will be important, but will not be enough.

I welcome the emphasis on fiscal stimulus, which I believe is now essential to restore global growth,” Mr. Strauss-Kahn said. “Each country’s fiscal stimulus can be twice as effective in raising domestic output growth if its major trading partners also have a stimulus package.”

He noted that the Summit Declaration recognizes that some countries have more room for maneuver than others. “We believe that those countries-advanced and emerging economies-with the strongest fiscal policy frameworks, the best ability to finance fiscal expansion, and the most clearly sustainable debt should take the lead,” he said.

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