Nations around the globe need to press forward with fiscal and reform promises, especially in the US and Europe, to reduce the uncertainties shackling growth, the head of the IMF said on Thursday, warning that the global economy barely dodged a bullet last year.
IMF managing director Christine Lagarde said the euro zone debt crisis and US “fiscal cliff” could have brought growth screeching to a halt, an outcome only avoided by decisions often taken at the last minute. In particular, she urged the US to raise its borrowing limit and pressed Europe to follow through with commitments to tackle its debt crisis, which in some countries means more fiscal consolidation. “Clearly, the collapse has been avoided in many corners of the world,” Lagarde told reporters even as she expressed concern policymaker resolve could weaken just because there is a “bit” of recovery in sight and financial stresses have eased.
“It’s important to follow through on policies to put uncertainty to rest,” she said. “There is still a lot of work to be done.”
In her first news conference of 2013, Lagarde focused on political battles over the budget in the US and the risks the euro zone’s debt crisis still presents. That focus is not new but Lagarde made clear she worried that complacency could set in.
In an interview with Reuters Insider television, Lagarde warned that a fight in the US over raising the nation's $16.4 trillion borrowing limit could be “catastrophic” for the global economy if it is not raised in time.
“I very, very strongly hope that all parties, all views will converge in the national interest of the US economy and in the international interest of the global economy,” she said. “To imagine that the US economy would be in default, would not honor the payments that it owes, is just unthinkable.”
The US bumped into the debt ceiling on New Year's eve and has been employing special measures to meet its financial obligations. The Treasury Department said those steps could be exhausted by mid-February, raising the spectre of a default.
A standoff over the budget at the end of last year nearly pushed the US, the world's largest economy, over the $600 billion fiscal cliff of tax hikes and spending cuts that economists said would tank the economy. But last-minute action by the Congress softened the blow, one of the policy steps Lagarde alluded