PARIS (MNI) – The new round of quantitative easing by the Federal
Reserve is a “courageous” step that will have “positive effects,” but
the risk of a double-dip recession cannot be ruled out, the chief
economist of the International Monetary Fund said Thursday.
Speaking in a radio interview from the IMF headquarters in
Washington D.C., Olivier Blanchard expressed optimism that the G20
nations would reach an accord at their upcoming summit in Seoul to
counter the risk of a currency war.
The Fed’s QE2 strategy is a “good measure,” he said. “If it created
inflation, it would not be the end of the world, because the U.S. is in
a period of very low inflation and there is a danger of deflation.”
The crisis has inflicted a “grave” illness on the U.S., Blanchard
reminded. “I think it will rebound, because it always rebounds,” but the
recovery from the financial crisis will take longer than the usual three
to four years, he cautioned. “I think there will be a long period of
convalescence with the risk of a relapse.”
The effect of the Fed’s QE2 for the emerging countries, which in
contrast to the advanced economies are doing “very well,” should be
positive as well, but “more complex,” since it will create capital
inflows that “can be excessive [and] can come too fast,” the IMF
economist reasoned. “It can rain too much and they will be a bit
overwhelmed.”
Despite his setback in the U.S. mid-term elections, President
Barack Obama should be able to play an important role in the G20,
Blanchard argued, predicting that the Seoul summit would “produce
results” — notably by enhancing international policy coordination. “I
think they will find solutions for the so-called currency wars.”
Blanchard warned Eurozone governments against overzealous fiscal
consolidation. Rather they should proceed “slowly and in a credible
fashion” with five-year plans to reduce deficits. “If they go too fast,
there’s a risk it could have a negative impact on growth and that Europe
would fall back into another recession,” he said.
Turning to his native country, France, Blanchard welcomed the
government’s pension reform as long overdue, but was doubtful it would
be sufficient for eternity. He encouraged further structural reforms of
the two-speed labor market, which tends to penalize the youth, but also
of the financial system and higher education.
–Paris newsroom +331 4271 5540; Email: stephen@marketnews.com
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