“The immediate risk is that the global economy tips into a downward spiral. . . . Even in a less severe scenario, key advanced economies could suffer from a protracted period of low growth,” the IMF said. The agency report urged all but the most debt-strapped nations to boost growth through expansive government budget and spending policies or through central bank measures such as lowering interest rates to stimulate the economy.
This advice comes as European leaders are preparing their newest strategy for addressing the debt crisis roiling markets in Europe and beyond. Top European officials are trying to put together a plan before they hold a crucial meeting Sunday, seeking to show they can shore up the continent’s banking system and stem the crisis before any major government defaults.
While leaders have agreed on the broad outlines of what should be done, German officials on Monday played down the likelihood of a grand and quick fix.
“Dreams that are again coming back, that . . . everything will be solved and everything will be over, will again not be fulfilled,” German Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, told a news conference. German Finance Minister Wolfgang Schaeuble said he did not expect the European summit to reach a “definitive solution,” according to news agency reports from Duesseldorf.
The IMF’s tight-budget orthodoxy was set aside three years ago, when the financial crisis prompted the agency to call for massive public spending to maintain economic activity. But the fund quickly returned to admonitions about the “wall of debt” rising in developed countries, including the United States.
Now, the IMF is shifting gears again.
The new tone is especially striking because it comes at a time when world leaders are focused on Europe’s debt crisis, in particular the risk that Greece and several other European countries could default on huge debts run up over years of profligate spending.
“We call it a sovereign debt problem, but if countries were growing and were competitive we would not be in the position we are in today,” Antonio Borges, director of the IMF’s European division, said at a recent conference in Brussels. Stronger economic growth in struggling countries, for instance, could help them raise the revenue needed to pay their bills.
At the IMF’s annual meetings last month, and again in its report Monday, fund officials praised governments that found ways to strike a balance between supporting growth and jobs in the short run and reducing budget deficits in the medium term.