IMF First Deputy Managing Director John Lipsky recently gave a speech in Seoul, South Korea, anticipating the upcoming G-20 summit to be held there towards the end of the year. (By tradition, the IMF managing director is European, while the second in command is American--something that needs reviewing if the IMF is to become a more participatory international financial institutions.) Anyway, what Lipsky said is very much in the US line of argument that it could have emanated from the lips of Tim Geithner or Larry Summers: short-term spending to spur growth, medium-term fiscal consolidation when recovery is underway, and rebalancing via greater demand in surplus countries:
Despite recent signs of slowing momentum, the global recovery is expected to continue. Nevertheless, the most likely prospect is for a moderate, multi-speed recovery, with significant downside risks. While financial markets have improved somewhat in recent weeks, ongoing financial market strains have heightened uncertainty. Against this backdrop, the overarching policy challenge is to sustain the recovery while restoring confidence.
Several key policy challenges are evident, some more immediate than others: These include:
* The need for an ambitious and vigorous program of financial system repair and reform. In many advanced economies, progress is underway on bank recapitalization; on bank consolidation, resolution and restructuring; and on regulatory reform. Greater transparency regarding bank liabilities and their exposures to sovereign debt, is a key goal. The recently completed European bank stress tests are receiving particular focus at present, and in general they have made a positive contribution to market sentiment. There is also a pressing need to reduce uncertainty about the broader regulatory environment.
* The need for credible, medium-term fiscal consolidation plans to bolster confidence, while not choking off the recovery. G-20 members have agreed to follow credible and “growth-friendly” medium-term fiscal adjustment plans that could include legislation creating multi-year targets. Reforms to pension entitlements and public health care systems, controlling non-entitlement spending, and strengthening fiscal institutions are critical tasks. Better strategies for public debt management also will be helpful. While most G-20 economies’ current fiscal plans appear to be appropriate, countries facing sovereign funding pressures still will require upfront measures to underpin confidence.
* The need for global demand rebalancing and key structural reforms to support future growth. In economies with excessive external surpluses, the transition toward domestic sources of demand should continue, helped by structural policies to reform social safety nets and improve productivity in the service sector as well as—in a variety of cases—more flexible exchange rates. In economies with excessive external deficits, fiscal consolidation and financial sector reform should help rebalance demand. But successful fiscal adjustment is difficult without strong growth. Structural reforms, particularly in product and labor markets, are needed to raise potential growth.