IMF Head: "Easy On The Austerity"

On Monday, Labor Day in the U.S., a day set aside to celebrate work, the world stock markets sold off big time (four to five percent at 11am Eastern time), a reaction surely related to the pitiful U.S. employment report Friday. And in the German newspaper Der Spiegel (it means "the mirror") ran an interview with the head of the International Monetary Fund, Christine Lagarde. In summary, she advised the developed countries to go easy on their new-found austerity, lest they throw the whole world into another recession. In particular, she believes the U.S. has room to take steps to stimulate the economy.

The International Monetary Fund is an organization of 178 countries, founded after World War II, which aims to encourage growth in the world economy, and lends to countries that are in trouble (historically the emerging markets).

I don't know how widely this interview will be reported, but Ms. Lagarde is an important decision maker in the world economy, and to me it's striking that she's advising the major countries to go easy on their budget austerity. From the interview:

We are in a situation where we can still avoid [a global recession]. The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we'll avoid the recession.

...For some countries, the path is fine and should continue as is. For others, some of the measures that have been taken are so strong, given the current deficit situation, that they can accommodate some relaxation -- especially if the economy weakens further, and provided there is a clear medium-term consolidation path.

But it's a country-by-country sort of thing. Ms. Lagarde said Germany, for instance, was in pretty good shape in terms of the strength of domestic demand.

On the U.S., she figures that the recent steps to cut spending for the long term are a good signal to the markets, however --

As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.

She also points out that a slowdown in the developed economies will feed back in a bad way to the emerging markets:

In a world that is so economically interwoven, where the actions of industrial countries have direct influence on emerging economies, one can't be stubborn when the situation changes.