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Davos 2012: IMF issues austerity warning Davos 2012: IMF issues austerity warning
(about 1 hour later)
Inappropriate spending cuts could "strangle" growth prospects, the head of the IMF has warned.Inappropriate spending cuts could "strangle" growth prospects, the head of the IMF has warned.
Austerity programmes must be tailored to each economy, Christine Lagarde said, and not be" across the board".Austerity programmes must be tailored to each economy, Christine Lagarde said, and not be" across the board".
The International Monetary Fund has been one of those stressing the need for countries to cut their debts, but some fear this could hit growth.The International Monetary Fund has been one of those stressing the need for countries to cut their debts, but some fear this could hit growth.
The correct response to the eurozone debt crisis has been a major debate at World Economic Forum in Davos.The correct response to the eurozone debt crisis has been a major debate at World Economic Forum in Davos.
"We are not suggesting there should be fiscal consolidation across the board," Ms Lagarde stressed."We are not suggesting there should be fiscal consolidation across the board," Ms Lagarde stressed.
"Some countries have to go full-speed ahead to do this fiscal consolidation, but other countries have space and room. They should explore what to do... in order to help themselves."Some countries have to go full-speed ahead to do this fiscal consolidation, but other countries have space and room. They should explore what to do... in order to help themselves.
"It has to be tailor-made.""It has to be tailor-made."
One of those expressing concerns about the possible implications of fiscal consolidation at the gathering at the Swiss ski resort was US Treasury Secretary Tim Geithner.One of those expressing concerns about the possible implications of fiscal consolidation at the gathering at the Swiss ski resort was US Treasury Secretary Tim Geithner.
He told the annual meeting of political and business leaders on Friday that there was a risk of a recessionary "cycle" from austerity measures.He told the annual meeting of political and business leaders on Friday that there was a risk of a recessionary "cycle" from austerity measures.
"There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crises," Mr Geithner said."There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crises," Mr Geithner said.
'Progress''Progress'
Crisis-hit countries such as Greece and Spain are implementing deep government spending cuts and tax rises in order to try to bring down their deficits. Crisis-hit countries such as Greece and Spain are implementing deep government spending cuts and raising taxes in order to try to bring down their deficits.
"For parts of Europe for a long time, there will be no alternative to very substantial adjustment in budget deficits," Mr Geithner said."For parts of Europe for a long time, there will be no alternative to very substantial adjustment in budget deficits," Mr Geithner said.
He is one of a number of leaders who have said this week that the deficit-cutting measures have been an important step in addressing the eurozone debt crisis.He is one of a number of leaders who have said this week that the deficit-cutting measures have been an important step in addressing the eurozone debt crisis.
"There is work under way. There is progress, as we see it," Ms Lagarde said. "There is work under way. There is progress, as we see it," Ms Lagarde said on Saturday.
But some see these policies as potentially very damaging. Financier George Soros told the BBC that the fiscal cuts, which Germany supports, could be very damaging and could even lead to a "lost decade" of no growth in Europe. But some see these policies as potentially very damaging. Financier George Soros told the BBC that the fiscal cuts, which Germany supports, could even lead to a "lost decade" of economic stagnation in Europe.
"This German insistence on austerity could destroy the European Union," he said."This German insistence on austerity could destroy the European Union," he said.
"This is reality, this is the harsh reality that we need to face."This is reality, this is the harsh reality that we need to face.
"It is not written in stone, the future is not predetermined. We determine the future, so it would be well within the possibilities of the authorities to change it.""It is not written in stone, the future is not predetermined. We determine the future, so it would be well within the possibilities of the authorities to change it."
Firewall Firewall
Austerity is only one part of the solution, Christine Lagarde stressed.Austerity is only one part of the solution, Christine Lagarde stressed.
"It is critical that the eurozone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the eurozone so that the financing needs of that zone can actually be met.""It is critical that the eurozone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the eurozone so that the financing needs of that zone can actually be met."
Plans for a "firewall", a much-expanded rescue fund made up of funds pledged by eurozone members, will be discussed at what is regarded as a crucial meeting of European leaders in Brussels on Monday.Plans for a "firewall", a much-expanded rescue fund made up of funds pledged by eurozone members, will be discussed at what is regarded as a crucial meeting of European leaders in Brussels on Monday.
She also wants to raise hundreds of billions of dollars of extra funds for the IMF to help any crisis-hit countries.
Holding up her designer handbag she said: "I am here with my little bag to collect a bit of money."
"There will be needs in the eurozone, no doubt about it, but in central and eastern Europe there will be needs as well. And in other countries including in low income countries, including in middle income countries, there will be needs. Short term for some, long term for others."
The UK has been one of those resistant to pledging extra funds for the IMF to help eurozone countries, but there have been indications in recent days that its stance is softening.
"I think there is a case for increasing IMF resources and I think that will also be a way of demonstrating that the world wants to help, together solve the world's problems," UK Chancellor George Osborne told the Davos audience.
But, like his US counterpart Tim Geither, he said any additional UK help would be conditional upon Eurozone countries demonstrating they were doing all they could do help fellow members.
"There aren't going to be further contributions to the IMF from other G20 countries, including Britain, unless we see the colour of their money, and I think that's a reasonable request."