Economics: A Call to Arms

From an article Dave S. contributed ...

More capital [for Europe's banks], Ms Lagarde [the new managing director of the IMF] argued, was essential to cutting the chains of contagion in the euro crisis. Without it there could easily be the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.

Echoing a theme raised by Ben Bernanke, the Fed chairman, in his speech the previous day, Ms Lagarde argued that fiscal policy should pivot, putting in place policies to reduce future deficits while supporting growth today. This was not a cop-out, she argued. Growth was necessary for fiscal credibility. After all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

In America that pivot would require credible decisions on future deficit reduction involving both tax increases and spending cuts, coupled with a focus today on making a serious dent in long-term unemployment. In Europe, she argued, this fiscal rebalancing, and the bigger short-term deficits it implied, would mean more official financing for some countries. That ought to include continued support from the ECB.

For more, see A Call to Arms, August 28, 2011 at The Economist.