Head of IMF says governments need to spend

French Finance Minister Christine Lagarde departs International Monetary Fund headquarters June 23, 2011 in Washington, D.C.

Steve Chiotakis: The International Monetary Fund is warning that the global economy is facing a threat of getting much worse. IMF chief Christine Lagarde says U.S. and European governments need to avert disaster by forgetting balancing budgets for now, and instead, stimulating the economy.

Marketplace's Stephen Beard is with us live from London with the latest. Hi Stephen.

Stephen Beard: Hello Steve.

Chiotakis: Why is the IMF suddenly so pessimistic?

Beard: Christine Lagarde, the IMF's new chief, says in a German press interview that the outlook has darkened quite quickly over the summer. She says there's been a rapid loss of confidence in the U.S. and in Europe. And she says it's vital that the U.S. and Europe take further steps to stimulate their economies rather than continue on the straight and narrow path of public spending cuts.

Tim Leunig of the London School of Economics says "three cheers" for Christine Lagarde. She's got it exactly right -- we do face a downward spiral.

Tim Leunig: The American job numbers, for example, were terrible. Absolutely terrible. So there is good evidence things are going wrong. Unemployment will go up. More people will lose their homes. That really isn't what we want.

Chiotakis: I know, Stephen, the U.S. and Europe have already spent loads of money trying to stimulate the economies. Can they afford more?

Beard: Well, Christine Lagarde admits that governments have used up a lot of ammunition in terms of public spending. But she says they can afford to spend more if they work together and coordinate. Anyway, she says, they can't afford not to, because if their economies slip back into recession they'll be in even more trouble.

Chiotakis: Marketplace's Stephen Beard in London. Stephen, thank you.

Beard: OK, Steve.

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