September 20, 2011
“A dangerous new phase.” Thus the International Monetary Fund all too accurately sums up the global economy before the fund’s annual meetings this week.
Rising government credit risks, including Tuesday’s Italy downgrade, shaky asset markets, weakening growth: the makers of the horror movie of 2008 are clearly contemplating a sequel – “Lehman Brothers II: This Time It’s Sovereign”.
As the old saw goes, IMF stands for “It’s Mostly Fiscal” and given the lack of room to move on monetary policy in advanced economies, it is taxing and spending where most of the policy argument is focused.
You hear two polarised arguments about fiscal policy in a debt crisis: one, austerity never works; two, you don’t get out of debt by taking on more debt. Neither is necessarily true. But the problem right now is that the first holds in Greece, where policy is based on ignoring it, and the second fails to hold in Germany, the US and UK, where policy is based on accepting it.
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