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Keep stimulus going says Blanchard


Keep stimulus going says Blanchard


There is probably no one in the world who has more economic data at his disposal to monitor the economic crisis. That makes him a first-class global reference.

Olivier Blanchard, Economic Councellor and Director of the Research Department of the International Monetary Fund in Washington. Or, less lyrically: the IMF’s chief economist. Born in France, he spent his entire professional life in the U.S., working at the country’s top research institutions like MIT and Harvard. Today, his wisdom and knowledge tell us: we have to be patient, if we want to see a recovery. euronews: There have been some signs recently that the global economic downturn has bottomed out. Is there really a sustained recovery under way and if yes, what about the timing and the speed of that recovery? Blanchard: I´ll give three parts to the answer: The first one, I think we have avoided the worst, that´s very, very good news. The second is that we had extremely bad numbers for the last quarter of 2008, and the first quarter of 2009. We are not going to see anything like this anymore. But we are probably going to see still negative growth in the second quarter, maybe the third quarter, in advanced countries. Then it will turn positive, close to zero. Next year, it´s likely higher. And then third, we basically need to build on this, and that´s the recovery part. At this stage we don´t think it´s going to be a strong recovery, we are thinking about going back maybe to a stable path within three to five years, it´s going to take a long time. euronews: Financial markets remain concerned that huge government spending and central bank cash injections, especially in the U.S., will spark inflation and undercut any nascent rebound. Do you share these worries? Blanchard: As far as central banks are concerned, they have increased their balance sheet enormously. It was largely because they bought assets that private investors didn´t want to buy. But I think that as the recovery comes, private investors are willing to buy these assets and central banks will be able to sell these assets back to them. So, I am not really worried about the inflation. I think the fiscal part is more worrisome than the first part. There governments face a really difficult challenge. What they should not do is stop the fiscal stimulus now. Because if they did this – private demand at this stage is still very weak – if they stopped, basically, pushing demand, we would probably not see the recovery. So, there has to be fiscal stimulus at least this year, probably next year and maybe even the year after. euronews: One particularly difficult problem in Europe is unemployment. Usually things on the labour market improve after the overall economy is picking up. How do you see the situation right now? Is there a risk that Europe will suffer sustained high unemployment? Blanchard: You are absolutely right. Again, two parts to the answer: it´s true that when growth becomes positive, it´s not enough to decrease unemployment. Growth has to be higher than normal. That´s going to take a while, that´s going to come around the end of 2010 or something like this. Until then, unemployment is going to increase and then, after this, you need growth higher than normal in order to decrease unemployment. So, in the best of scenarios you are going to get unemployment increasing for some time in Europe, probably another year and a half. Then the question is, can you get it back down. And there you have two points: demand has to be sufficient, but you also have to make sure that the labour market has to respond. euronews: High unemployment hurts consumption and growth prospects. That´s why many governments around the world have come up with major stimulus plans. What is your assessment of the situation right now? Is there a need to tighten monetary and fiscal policy further or is it time to do less? Blanchard: Surely, now, it is not time to take away the fiscal stimulus or to start increasing interest rates. The economy is very weak, private demand is very weak. If you think about consumers, they are not in the mood to spend. If you look at firms, they are not in the mood to invest. So, if you were to take away the stimulus, you´d basically stop the recovery. It´s absolutely essential for the moment to continue with the monetary policy and fiscal policy that we have had in the last year. euronews: A risk to recovery is high oil prices, which could increase the danger of stagflation, a combination of high inflation and declining output. How real is this danger now that oil prices are up again? Blanchard: It complicates the recovery a bit, it is more a brake on the recovery, I don´t think it will kill it. I think we may have seen an increase in oil prices which is not justified by fundamentals. When you see this, you expect that things will basically adjust. So I don´t think that we are going to see oil prices go much above 70 dollars. If they stay around that, that seems like a good price and a price that is consistent with recovery. euronews: Regulation of financial markets. The bulls and the bears of the markets won´t be totally tamed, but we will certainly see more transparency, more responsibility and more stability. But there seems to be a rift within the G20 and the G8 over the degree of regulation. What can we reasonably expect when all the dust has settled? Blanchard: We don´t quite know what to expect when the dust settles. Not only because we are not sure exactly what type of regulation we need, but because we don´t know what kind of financial system we are going to get. And in turn, the financial system we get depends a bit on the type of regulation we have. So, I think here, there are some principals: you can not regulate just a part of a financial system. You actually have to look at the whole financial system, you have to look at systemic risks which involves looking at, if not regulating, a large number of players. I think, that´s the main principle. I am under no illusion that whatever regulation there is, we will miss something and something else will come. Hopefully, not of the same magnitude of what we have seen. euronews: Last question: Much has changed for the IMF during the economic crisis. The G20 summit promised a tripling of the fund´s lending capacity, the IMF prepares to issue bonds for the very first time – so, on the whole the fund seems to be getting unprecedented resources. In light of this “rearming”, how do you assess the future role and the future influence of the IMF? Blanchard: I think the fund will play an important role, if it can monitor systemic risks not only of a financial nature, which was the case of this crisis, but of different kinds. It basically has to be on the lookout. It is in a unique position to see what happens in the world, we get an enormous amount of information that nobody else gets. I think we basically have to play that role, to be ready to lend if needed. If we succeed in this, we will be important not only in the crisis, during which we have been but also in the next 10, 20, 30 years. That´s what we are aiming to do.

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