G20 – October 14-15, 2011


The IMF no longer believes in the virtuosity of the expansionary austerity policy.
G20 October 14-15, 2011

Key points

  • The global economy has entered a dangerous phase. Policy makers must act boldly to finish the job they began in 2009, lest the gains from the recovery since then be lost. Collective action can put the global economy on a path to strong, sustainable, and balanced growth.
  • Adverse feedback loops between the real economy and the financial sector have intensified, as private and public sector balance sheets have weakened, uncertainty has been exacerbated by policy indecision, and demand rebalancing has stalled. Even assuming that policies prevent downside risks materializing, projections are for an anemic recovery in major advanced economies and a cyclical slowdown in emerging economies. Global growth is expected to fall to about 4 percent in 2011–12.
  • Downside risks are severe. The immediate risk is that the global economy tips into a downward spiral of increased uncertainty and risk aversion, dysfunctional financial markets, unsustainable debt dynamics, falling demand, and rising unemployment. Even in a less severe scenario, key advanced economies could suffer from a protracted period of low growth.
  • Policy action along three key fronts will help break the adverse feedback loop between weaker growth and confidence, fiscal tensions, and financial fragilities. This includes well calibrated fiscal adjustment to reassure markets; liquidity provision in the euro area to avoid deeper dislocation and relieve funding strains; and building banks’ capital buffers in Europe.
  • In advanced G-20 economies, fiscal sustainability must be restored through credible medium term consolidation plans. Countries with high debt and facing market pressure must press ahead with “growth-friendly” consolidation now. In others, fiscal policy should navigate between the perils of undermining credibility and undercutting recovery, and facilitate a pickup in private demand. To alleviate prevailing market pressures in the euro area, the ECB should continue its extended liquidity operations and sustain the Securities Market Program (SMP) alongside the support provided by the European Financial Stability Facility (EFSF) for as long as necessary to stabilize issuance costs for banks and sovereigns. At the same time, banks should be urged to build capital buffers in a coordinated fashion, using national public and euro area resources, including the EFSF, if necessary.
  • In emerging G-20 economies, near-term policy should focus on responding to spillovers from moderating growth in advanced economies and heightened global risk aversion in financial markets, subject to available policy space. In key surplus economies, fostering sustained, inclusive medium-term growth requires removing distortions, implementing structural and financial reforms, and moving to a more market-based exchange rate.
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