IMF economy warnings: Time to panic?

Christine LaGarde at the IMF press conference, 22 Sept 2011 Christine Lagarde, managing director of the IMF, says the window for action is narrowing

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When the dramatic becomes wearisomely familiar, maybe it is time to panic.

With the IMF meeting in Washington we again have a parade of world leaders issuing dire warnings about the state of the economy. Again, they exhort their colleagues to take firm political action, to prevent what is already bad from getting worse.

Christine Lagarde, the new IMF boss, says this is a "dangerous phase" and while there is a path to recovery, it is narrower than three years ago.

She says the US must repair its broken finances and reduce debt, while balancing that with growth creation.

This feels like a critical moment. Not simply today, nor this week, but the next few months will be a test of political systems in Europe and the US.

The short-term problem is that just talking about all this makes it worse, as we've seen with the Federal Reserve's attempt to "twist".

Dr Fed decided that the patient was more seriously ill than we'd thought. So he came up with new stronger medicine. The problem is that the markets, like relatives around the sickbed, heard the diagnosis with alarm and discounted the new prescription.

No one seems to doubt that what is needed is firm political action.

"The two other clouds still over us are the European crisis and the deep concern that you can see across the world and around the country about whether the political system in the United States is up to the challenges we face," warned US Treasury Secretary Tim Geithner.

But there is something false about the picture being painted of weak leaders who can't quite summon up the energy to do something.

The problem isn't really the lack of political will, it is the lack of political agreement.

In America, President Obama believes he knows what to do. He has a plan to promote growth, but its mixture of stimulus spending and increased taxation is anathema to the Republican-controlled House of Representatives.

Members of the US Congress' debt super-committee The bicameral, bipartisan 'super-committee' has differing views on how to reduce the US debt

The Republicans also know what to do. They would slash spending and taxation, but they wouldn't stand a chance getting it past the president or the Senate.

Some members of the special panel on how to reduce the US debt have already said they won't accept any tax rises. Others say there can be no agreement without them.

In Europe, the problem isn't between political parties but countries, or indeed voters, who don't share their leaders' enthusiasm for cross-border solidarity.

In particular, Germany, no longer in thrall to a horrified fascination with its own past, isn't willing to dig deeper into its pockets to endlessly fund the European project.

Germans are still reeling from the huge cost of reuniting their own country, and know all about the burden of supporting a failed economy.

The US and the EU have very different histories. For a start, one is a country, the other is not.

But both have political systems that were deliberately designed to move at the pace of the slowest participant. You could say they were crafted to prevent bold radical, actions unless everyone is signed up to it.

It means that political will has to be aimed at getting agreement, which only comes at a great price.

The uncomfortable fact is that while economics is global, politics is local.

Mark Mardell, North America editor Article written by Mark Mardell Mark Mardell North America editor

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  • rate this

    Comment number 1.

    Spot on as regards EU. It is not a case of indecision or dithering. The decision is clear ---no limitless fiscal transfer from North to South. Those who complain about lack of decisiveness, leadership etc are just having a problem wakng up to this uncomfortable reality. The people have grown tired of vainglorous politicians playing games with their money. Now there will be you-know-what to pay.

  • rate this

    Comment number 2.

    I can only speak to the political gridlock in the USA. The forces that have caused the electorate to become so dramatically polarized are about to reap what they have sown. When you start demonizing your opponents as "hating America" or being "mentally ill" because of their political beliefs, you make cooperation impossible. Congratulations!

  • rate this

    Comment number 3.

    Maybe this is the time to show big governments super high taxes do not work,but i doubt it.Currently we have a Harvard grad spitting out policies that did not work the first time,but we are going to try again !
    It is time to bring home the troops,start putting tariffs on imports and taking care of the USA,we need stop being the worlds police man and take care of our own.

  • rate this

    Comment number 4.

    I wonder about these economists. Do they know anything about anything? I rememhalf his time ber Greenspan half his time explaining how he was going to solve problems the using the other half of his time explaining why it didn't work. Currently they are for ever predicting job growth numbers and invariably are wrong.
    Peter D

  • rate this

    Comment number 5.

    2.DenverGuest writes "When you start demonizing your opponents as "hating America" or being "mentally ill" because of their political beliefs, you make cooperation impossible. Congratulations!"

    Biden: Tea stands for "terrorist"

    Congratulations indeed.


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