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The best medicine is to prepare for growth: IMF

Faced with a once-in-a-century economic crisis, governments are rolling out massive spending programs that will increase debt and deficits, but IMF economist Gian Maria Milesi-Ferretti said now is not the time to worry about that.

The “best medicine” is to prepare to restart growth once the coronavirus pandemic has passed, Milesi-Ferretti, deputy chief of the International Monetary Fund‘s research department, told AFP in an interview.

Amid this unprecedented crisis, how reliable is the IMF’s forecast for a 3% contraction of global growth when as recently as January the fund was predicting growth of 3.3%?

There is extreme uncertainty – we had to provide a baseline scenario. We have provided a number of alternatives as well in the document where we look at cases where the restrictions have to remain in place for a longer period of time this year, or where you have a new wave of infections coming later in the year into 2021. And of course, outcomes would be much worse.

We know in general that economic forecasting is very hard, that we are wrong all the time. We may be wrong for the right reasons, but we are wrong all the time. (Because) some shock happens, something changes the way we the economy actually performs. 

But in this case, the uncertainty comes from so many sources, in particular from the nature of the disease. 

Governments are responding to this severe crisis with huge spending programs, but how concerned are you about rising debt and deficits?

It is going to be extremely expensive, but it is extremely important and extremely necessary… I think we need to have measures that are effective and targeted, but they need to be large…

If we set the conditions for the economies to recover quickly from the crisis, revenues will go up, the emergency spending can be run down. 

If we let firms go down the drain, if we sever the relations between workers and firms, if we lose a portion of our productive system, because we want to save now 1% of GDP over the next three months, we are not doing service to the economy….

That is the best medicine literally that we have to make sure that the economy will be, all these economies will be, in a situation to meet their debt obligations going forward…

But as long as global interest rates stay extremely low, the debt service is going to be relatively limited. 

The euro area is facing one of the worst recessions this year. Does the IMF favour a common debt instrument to help countries like Italy, where the economy was fragile before the pandemic?

I think what we should worry about now is having, in addition to a strong national response, a strong response at the euro area level as well, considering that the crisis is really exogenous, this is really a shock that has nothing to do with a country’s behaviour. 

We’ve had a very strong reaction from the European Central Bank.

I think, both on economic grounds and on social grounds (you have) to think of, you know, the importance of solidarity in periods of stress… I think it is important to have a meaningful response at the European level, as we’ve heard from the European Central Bank.



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