New IMF boss joins calls for Plan B

The new IMF boss, Christine Lagarde, has joined calls for a Plan B. In an FT op ed she says "slamming on the brakes too quickly will hurt the recovery and worsen job prospects".

As the German economy joins Britain and France in the European slow lane, the incoming head of the IMF, Christine Lagarde, has joined the calls for a Plan B. In a strongly worded op ed for today’s Financial Times, the former French Finance Minister says “slamming on the brakes too quickly will hurt the recovery and worsen job prospects”. She calls for a range of policies such as supporting employment creation, advancing planned infrastructure and easing adjustment in housing markets.

Ms Lagarde’s column appears in the same spot in the Financial Times as yesterday’s joint op ed by George Osborne and four other finance ministers but her take is markedly different. Where Osborne’s piece outlined that, “More short-term fixes without serious medium-term commitments will only weaken confidence further”, Mme Lagarde calls for¬† “short-term support for growth and jobs”. The BBC’s Robert Peston was quick to pick up on the political implications of her piece tweeting last night that:

“Lagarde of IMF calls for short-term measures to promote growth & longer term fiscal consolidation, in FT. Pressure on UK to temper cuts?”

In the op ed, titled ‘Don’t let fiscal brakes stall global recovery‘, Lagarde writes:

“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.

“Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs.

“By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation. After all, who will believe that commitments to cuts are going to survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?”

Her op ed comes on the morning that Germany growth dropped to 0.1 per cent in the second quarter of the year. Last week French growth ground to a halt while British growth hit just 0.2 per cent over the same period – forcing the Bank of England to downgrade its growth forecast for 2011.

Today’s higher than expected inflation figures will place an even greater strain on squeezed living standards. With neither domestic nor international sources offering much hope for growth, the pressure is building on George Osborne to accept the inevitable and concede that a Plan B is the only way ahead.

Hat-tip: The ever alert Duncan Weldon.

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