29 Jan 2012

IMF chief warns cuts could stop growth

8:18 am on 29 January 2012

Inappropriate spending cuts could strangle growth prospects, the head of the IMF has warned.

Austerity programmes must be tailored to each economy, Christine Lagarde said, and not be "across the board".

The International Monetary Fund has been one of those stressing the need for countries to cut their debts, but some fear this could hit growth.

The correct response to the eurozone debt crisis has been a major debate at World Economic Forum in Davos.

"We are not suggesting there should be fiscal consolidation across the board," Ms Lagarde stressed.

"Some countries have to go full-speed ahead to do this fiscal consolidation, but other countries have space and room.

"They should explore what to do ... in order to help themselves. It has to be tailor-made."

One of those expressing concerns about the possible implications of fiscal consolidation at the gathering at the Swiss ski resort was US Treasury Secretary Tim Geithner.

He told the annual meeting of political and business leaders on Friday that there was a risk of a recessionary "cycle" from austerity measures.

"There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crises," Mr Geithner said.

Crisis-hit countries such as Greece and Spain are implementing deep government spending cuts and raising taxes in order to try to bring down their deficits.

"For parts of Europe for a long time, there will be no alternative to very substantial adjustment in budget deficits," Mr Geithner said.

He is one of a number of leaders who have said this week that the deficit-cutting measures have been an important step in addressing the eurozone debt crisis.

Ms Lagarde echoed those on Saturday: "There is work under way. There is progress, as we see it,"

But some see these policies as potentially very damaging. Financier George Soros told the BBC that the fiscal cuts, which Germany supports, could even lead to a "lost decade" of economic stagnation in Europe.

"This German insistence on austerity could destroy the European Union," he said. "This is reality, this is the harsh reality that we need to face.