Belt-tightening in Europe will be “extremely painful” and take up to 20 years, the chief economist of the International Monetary Fund (IMF) warned in today, as international troubleshooters arrived in Greece to check the country was sticking to its austerity measures.
Referring to highly indebted eurozone economies such as Greece, Olivier Blanchard said: “The adjustment is easier for countries that can devalue their currency.
"In countries that do not have this option, it is fair to say that the tightening will be extremely painful.”
Mr Blanchard told La Repubblica, the Italian newspaper, that the process would require concerted efforts “over 10 or 20 years."
In the short-term, he said, countries would have low growth rates and “sacrifices on salaries will be inevitable in order to regain competitiveness".
Because it is part of the eurozone, with interest rates set by the European Central Bank, Greece is unable to cut interest rates. (AtW's comment: that's exactly how it should be - they should cut costs rather than fuel growth via debt or print money (like UK) in order to finance deficit)
Speaking more generally, Blanchard said that governments in Europe and the United States would have to impose spending cuts and tax increases to put public finances back in order in the wake of the economic crisis.
Finance officials from the European Commission, the European Central Bank and the IMF descended on Greece today at the start of a three-day trip to check on its effort to tame its rampant debt on the eve of a general strike against austerity measures.
Under acute pressure from its 15 eurozone partners, the Greek Government has pledged to slash its deficit to 8.7 per cent this year (AtW's comment: so who will put pressure on UK to slash deficit? So much for "independence" in monetary policy - sometimes dependence is a better option), agreeing to painful public spending cuts that sparked last week's union strike call.
This month Mr Blanchard announced a significant change of thinking at the IMF, admitting that after years of lecturing governments about the need for low inflation, the international lender may have got it wrong in insisting countries keep inflation below 2 per cent.
He and co-authors of a paper said that allowing higher inflation of up to 4 per cent and greater government intervention might be a positive move.
By keeping inflation and interest rates low during good times, they argued, governments in places such as Eastern Europe have little room to cut rates any further and are forced to rely on raising taxes and cutting expenditure even in the midst of a recession.
On the same day, in an internal IMF magazine, Mr Blanchard also suggested that the IMF should in future impose lower debt targets on countries.
He said: "Some advanced economies that entered the crisis with high levels of debt and large unfunded liabilities have had limited ability to use fiscal policy, and are now facing difficult adjustments.
"Those emerging market economies — some, for example, in Eastern Europe — that ran highly procyclical fiscal policies driven by consumption booms are now forced to cut spending and increase taxes despite unprecedented recessions.
"This suggests that we should revisit target debt to GDP ratios. Maybe we should aim for much lower ratios than before the crisis.
"This is a long way off, given where we start, but this is another issue we must revisit."
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Doomed or Boomed?
Referring to highly indebted eurozone economies such as Greece, Olivier Blanchard said: “The adjustment is easier for countries that can devalue their currency.
"In countries that do not have this option, it is fair to say that the tightening will be extremely painful.”
Mr Blanchard told La Repubblica, the Italian newspaper, that the process would require concerted efforts “over 10 or 20 years."
In the short-term, he said, countries would have low growth rates and “sacrifices on salaries will be inevitable in order to regain competitiveness".
Because it is part of the eurozone, with interest rates set by the European Central Bank, Greece is unable to cut interest rates. (AtW's comment: that's exactly how it should be - they should cut costs rather than fuel growth via debt or print money (like UK) in order to finance deficit)
Speaking more generally, Blanchard said that governments in Europe and the United States would have to impose spending cuts and tax increases to put public finances back in order in the wake of the economic crisis.
Finance officials from the European Commission, the European Central Bank and the IMF descended on Greece today at the start of a three-day trip to check on its effort to tame its rampant debt on the eve of a general strike against austerity measures.
Under acute pressure from its 15 eurozone partners, the Greek Government has pledged to slash its deficit to 8.7 per cent this year (AtW's comment: so who will put pressure on UK to slash deficit? So much for "independence" in monetary policy - sometimes dependence is a better option), agreeing to painful public spending cuts that sparked last week's union strike call.
This month Mr Blanchard announced a significant change of thinking at the IMF, admitting that after years of lecturing governments about the need for low inflation, the international lender may have got it wrong in insisting countries keep inflation below 2 per cent.
He and co-authors of a paper said that allowing higher inflation of up to 4 per cent and greater government intervention might be a positive move.
By keeping inflation and interest rates low during good times, they argued, governments in places such as Eastern Europe have little room to cut rates any further and are forced to rely on raising taxes and cutting expenditure even in the midst of a recession.
On the same day, in an internal IMF magazine, Mr Blanchard also suggested that the IMF should in future impose lower debt targets on countries.
He said: "Some advanced economies that entered the crisis with high levels of debt and large unfunded liabilities have had limited ability to use fiscal policy, and are now facing difficult adjustments.
"Those emerging market economies — some, for example, in Eastern Europe — that ran highly procyclical fiscal policies driven by consumption booms are now forced to cut spending and increase taxes despite unprecedented recessions.
"This suggests that we should revisit target debt to GDP ratios. Maybe we should aim for much lower ratios than before the crisis.
"This is a long way off, given where we start, but this is another issue we must revisit."
--------------
Doomed or Boomed?
Comment