- The Washington Times - Monday, September 24, 2012

The International Monetary Fund chief on Monday encouraged U.S. policymakers to look past the “political calendars” of an election year and prevent the “fiscal cliff” from wreaking havoc on the global economy.

Speaking in Washington two weeks before the World Bank and IMF’s annual meetings in Tokyo, where leaders will try to address the world’s major financial problems, IMF Managing Director Christine Lagarde warned that allowing a series of tax increases and budget cuts to take effect would stunt growth in the U.S. and have a ripple effect on other economies around the world.

“So we all hope that, despite political calendars, which anywhere in the world entail a degree of uncertainty and unpredictability, there will soon be enough political clarity and no political games in order to actually focus on removing this uncertainty and making sure that both the issue of the fiscal cliff and the issue of the debt ceiling are addressed properly,” Ms. Lagarde told economists at the Peterson Institute for International Economics.

The so-called “fiscal cliff” is a double whammy set to hit the economy at the start of 2013 unless Congress averts it. On the one hand, the Bush-era tax cuts are set to expire at the end of the year, and the two parties are deadlocked in politicking over them. Separately, a budget sequestration that would impose more than $1.2 trillion in automatic spending cuts over the next decade will take effect unless another deficit-cutting deal is reached.

Ms. Lagarde noted that a “dramatic tightening” of both tax increases and spending cuts would lead to a 2 percent contraction in America’s GDP, which would wipe out any small amount of growth economists are predicting in the U.S. economy.

“That is not good at all,” she said. “So that’s erasing any growth in the United States, would be a consequence of not dealing with the fiscal cliff and not dealing with the debt ceiling, which are both looming threats.”

Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics, who attended the speech, said that “she made it clear” that not dealing with the fiscal cliff will lead to another recession in the U.S.

“But it’s an avoidable bullet, and we can dodge it if we want to,” he said.

Ms. Lagarde also called for U.S. leaders to figure out “what is the plan for actually reducing debt going forward” in the medium term.

In a wide-ranging speech about the world’s financial problems, Ms. Lagarde said the IMF’s forecast for the global economy has trended downwards, though she said she wouldn’t give any specifics until the Tokyo meetings.

“The global economy is still fraught with uncertainty, is still far from where it needs to be,” she added. “The situation is a little bit like a jigsaw puzzle. There are pieces that fall into place, but the whole jigsaw puzzle is not settled.”

Europe’s massive debt crisis remains at the “epicenter of the crisis,” she said, where the “most action is needed.”

“Uncertainty in the eurozone remains the greatest risk in the world economy today,” she said, calling for “timely and flexible” help for countries such as Spain.

She praised recent moves by central banks, pointing to the European Central Bank’s unlimited bond-buying program for troubled nations as a “turning point.”

She also gave credit to the U.S. Federal Reserve’s quantitative easing decision to intervene in the real estate market and stimulate the nation’s economy.

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