MercoPress. South Atlantic News Agency

“Macroeconomics policies must support growth” warns IMF chief Lagarde

“Belt-tightening should not be so fast that it imperils recovery” warns IMF

The new head of the IMF urged global policymakers to pursue urgent coordinated action, including the mandatory recapitalization of European banks, or risk descent into renewed world recession.

“Developments this summer have indicated we are in a dangerous new phase,” International Monetary Fund Managing Director Christine Lagarde said at an annual gathering of policymakers from around the world hosted by the Kansas City Federal Reserve Bank.

“The stakes are clear; we risk seeing the fragile recovery derailed. So we must act now,” she said.

Two years after the end of the worst of the financial crisis, growth in both the United States and Europe is sputtering, and debt crises and indecision on both sides of the Atlantic have shaken public confidence in a global recovery.

Appearing with Lagarde on a panel, European Central Bank President Jean-Claude Trichet did not address the Euro zone debt crisis in his prepared remarks. He focused instead on the need to tailor the central bank's policies to the situation it faces.

“The use of non-standard measures depends on the functioning of the monetary policy transmission and must be commensurate with the level of malfunctioning or disruption of money and financial markets and segments of markets,” Trichet said.

Advanced economies must forge long-term plans to bring their debt under control, but at the same time should not pursue belt-tightening so fast that it imperils recovery, Lagarde said in her first major speech since taking over the top IMF job from Dominique Strauss-Kahn in July.

“Put simply, macroeconomic policies must support growth,” the former French economy minister said.

“Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation,” she said, adding that central banks should stand ready to jump back into unconventional policy actions if needed.

In what appeared to mark a new stage in dealing with European banks, Lagarde called for “mandatory substantial recapitalization” of European banks through private channels if possible, but otherwise through some form of public Europe-wide funding.

Individual European countries must also put in place deficit-cutting plans with a “credible finance path” – including, she said, continued support from the European Central Bank.

In the United States, the focus on long-term fiscal consolidation must not ignore the importance of fostering near-term growth, she said.

“After all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?” she asked.