International Monetary Fund chief Christine Lagarde has warned the US it has the potential to be its “own worst enemy” over the fragile economic recovery and that failure to reach a comprehensive settlement over the fiscal cliff could see growth plummet to zero.
In forthright comments over the impending fiscal cliff, the IMF managing director said that “if the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero”. The markets would react quickly, “and the stock market would take a hit,” she said.
All the current signs of optimism over the economy that she identified – including falling unemployment, the housing sector bottoming out and reduced household debt – would be negated.
Speaking on CNN’s State of the Nation, Lagarde predicted that the diverse landscape of the US economy “could be significantly improved or worsened by the fiscal cliff, fiscal deficit and the debt of the country that are three topics that can be addressed now in a comprehensive fashion.” She added: “The real threat is here, with us, and that can be addressed.”
The cautionary words of the IMF chief underlined how closely the world is watching the fast-approaching fiscal cliff deadline. On 1 January, if Congress does not act, a package of $600bn spending cuts and tax rises will automatically kick in, sending shock waves around the world that could damage what she characterized as the slow and laborious economic improvements being made across the Eurozone.
But the message Lagarde was clearly hoping to deliver was that failure to reach a comprehensive deal on all three factors – the fiscal cliff, debt ceiling and long-term debt – would hurt the US far more than it would hurt anyone else. The US she said “is more exposed to its own difficulties and issues than elsewhere in the world because it is such a big player. We can be our own best friends or our own worst enemy.”
In October, the IMF predicted that US growth would fall to 2.1% next year, from 2.2% this year. The jobs market remains very tentative, with 146,000 new jobs created in November, enough to push the unemployment rate down to 7.7% but not enough to build real momentum.
Talks between the White House and the Republican-led House of Representatives are at a standstill, with the sticking point being the two main parties’ inability to reach agreement over raising tax rates for the top two per cent of income earners.
President Obama has made clear he is not prepared to budge over allowing the tax rates to rise back to the levels of the Clinton administration, while the Republican leadership says they will support increases in tax revenues from closure of loopholes and deductions but not tax rate increases on any Americans.
Lagarde said that the most important thing was for the warring factions to reach a comprehensive and balanced agreement that will work for the long term. Anything less would foment “uncertainty that fuels doubt that prevents investors, entrepreneurs, households from making decisions because they don’t know what tomorrow will be.”
“My view, personally, is that the best way to go forward is to have a balanced approach that takes into account both increasing the revenue, which means, you know, either raising taxes or creating new sources of revenue, and cutting spending,” she said.
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