Sacrificing growth for the sake of austerity couldput the entire world economy in jeopardy, the head of the InternationalMonetary Fund told global financial leaders Friday, calling for medium-termwork to bring down debt levels and urgent action to get the unemployed back towork.
In a forward-looking speech to fellow financial leaders atthe IMF and World Bank annual meeting in Tokyo, IMF chief Christine Lagardealso warned against backsliding on reforms needed to prevent future financialcrises.
"The first priority, clearly, is to get beyond thecrisis, and restore growth, especially to end the scourge ofunemployment," Lagarde said.
That requires monetary policies that encourage banks tolend, and the "right pace" of adjustments in spending. Debts must bebrought down in the medium term, and structural reforms are needed to sustaingrowth in the long term, she said.
"That's the package that is needed," Lagarde said."Let us not delude ourselves. Without growth, the future of the globaleconomy is in jeopardy."
The IMF has scaled back its global growth forecast for 2012to 3.3 percent from 3.5 percent, and has warned that even its dimmer outlookmight prove too optimistic if Europe and the United States fail to resolvetheir crises.
On Friday, the fund said economic growth in the Asia-Pacificregion slowed to 5.5 percent in January-June — well above the global average,but the lowest for the region since the financial crisis in 2008 — largelybecause of sluggishness in Europe and the U.S. It also noted weakness in Chinaand India, whose dynamism had helped counter weakness elsewhere.
"There are big challenges as well. We must not getcarried away," she said. "The global recovery is still too weak. Jobprospects for untold millions are still too scarce, and the gap between therich and the poor is still way too big."
Europe's darkening economic outlook is drawing calls formore public support even from austerity champion Chancellor Angela Merkel, whosaid Thursday it was incumbent on Germany, whose 0.3 percent growth in thesecond quarter helped offset a 0.2 percent contraction in the 17-nation eurozone,to "do things to stimulate the European economy."
Lagarde has urged that European creditors give Greece anextra two years to meet austerity targets required to get and continuereceiving loans, after nearly defaulting on its mountain of debt.
While the spending cuts and tax increases are required toget its public finances in order, with unemployment at over 25 percent,"It's sometimes better to have a little more time," she saidThursday.
Both Lagarde and Jim Yong Kim, president of the World Bank,stressed that without greater equity and equality, growth will beunsustainable.
The turmoil of the Arab Spring protests underscores the needto ensure that growth is shared and provides jobs for young workers and women,Kim said.
The gathering of top financial leaders in Tokyo, the firstin nearly a half-century, has highlighted Japan's own struggle to escape twodecades of economic malaise and grapple with its own huge debt burdens. It alsohas drawn praise for Japan's keenness to share lessons learned in rebuildingfrom its March 2011 earthquake, tsunami and nuclear disasters.
Finance ministers and central bankers from the Group ofSeven richest nations met Thursday to discuss the European debt crisis and thelooming budget impasse in the U.S. Local reports said Japan sought support forits own woes with the stubborn appreciation of the Japanese yen, which bymaking its exports more expensive in overseas market is hindering its ownrecovery.
The leaders released no communique, though Japan's Ministryof Finance announced that the group had supported moves to resolve debts andmove ahead on new financing for Myanmar as it carries out sweeping economicreforms.
U.S. Treasury Secretary Timothy Geithner sought to strike areassuring tone regarding the threat of the so-called "fiscal cliff"of tax increases and deep spending cuts that will take effect in 2013 unlessCongress and the Obama administration resolve a budget impasse.
The Obama administration intends to try to fix the problembefore the end of the year, he said.
Geithner said, "We're going to take a run at it."
Such moves would be a first step toward longer-term reformsneeded to make growth sustainable in the long run, Lagarde said, noting thatdebt levels averaging over 100 percent in the advanced economies are at"pretty much wartime levels."
"This leaves governments highly exposed to subtleshifts in confidence," she said.
Planners must balance growth with debt reduction as theywork to reform flawed financial markets and institutions.
Lagarde warned against waning momentum for reforms, notingdelays in improving regulation of derivatives and shadow banking, andemphasizing the urgency for reducing debts once growth is restored.
"One lesson though is clear from history," shesaid. "Reducing public debt is incredibly difficult without growth. Highdebt, in turn, makes it harder to get growth, so it's a very narrow path to betaken.
"It's probably a long path, and one for which there isprobably no shortcut, either. It's a path that needs to be taken," shesaid.