Published December 14, 2011
The International Monetary Fund's chief economist cautioned on Wednesday against exacting 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.
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.
But even assuming the region is able to get its debt problems under control, next year "is not going to be nice" for Europe, as bank deleveraging and fiscal consolidation will be a major drag on the economy.
As to the impact of the crisis on the rest of the world, "There is enormous ambiguity," said Blanchard.