International Monetary Fund Head on Europe and Stagflation

The head of the International Monetary Fund, Dominique Strauss-Kahn, said yesterday that the most urgent economic priority for European governments is to reduce the damage from the financial market crisis amongst fears of inflation, recession and stagflation (best word EVER). He warned that without appropriate measures, the crisis would spread from the US to developed countries with serious economic consequences.

Before I continue with the Strauss-Kahn thing, I must define my favorite word of the whole day. That’s right, stagflation. No, it isn’t the rising price of stags/stag offspring. It’s actually the combination of inflation and stagnation (stagnation being slow economic growth, the possibility of recession and increasing unemployment rates). This forces central banks to keep interest rates high to slow growth, where they would normally reduce lending costs to strengthen the economy.

At a conference in Paris with The Organization for Economic Cooperation and Development, Strauss-Kahn also noted that:

In an economic environment such as this, governments and citizens should be interested in reforms that can promote growth without inflationary risks. We are in the middle of a financial crisis which will have significant implications for many countries.

The Organization for Economic Cooperation and Development (also known as OECD for people who haven’t got time to waste on lengthy titles) is an international organization of thirty countries in total. It promotes the principles of a free market economy and representative democracy – providing a setting where governments can compare policy experiences and seek answers to shared problems. Wow…seeking answers to shared problems and comparing experiences. Sounds like a sleepover - but with policies and old French men. Ok, nothing like a sleepover at all, but you get the idea.

“Obviously the financial market crisis is now more serious and more global than a week ago,” he said, although Strauss-Kahn also expressed his belief that central banks will be able to manage problems in the financial system as they have done so far. He also said that the priority for European governments should be to contain economic damage from the financial market crisis whilst strengthening the stability of the system, which will be difficult with impending threats of both inflation and recession.

Strauss-Kahn went on to emphasize that the crisis only highlighted the need for structural reforms in European economies, to increase competitiveness and productivity in order to generate the growth needed to sustain the European model of justice and dignity.

Comments

[Lawrence York:]

A lot of lip service by a bureaucrat I think and unfortunately the kind of reform needed will be a developed - emerging growth battle resulting in a less than optimum outcome. Indeed we have reached the time to consider whether financial solvency and/or amount of debt should not be considered as regulatory elements in trade and international relations among countries by a world governing body. For example, would a great debtor and/or insolvent nation who must externally finance its massive debt be more inclined to advocate peace, stability, and growth in their international relations or chaos, fear, and instability? For surely the former would drastically increase their debt service and perhaps make it impossible to service their debt? I think you can see that OECD member countries may sharply diverge on agreement to resolve such a matter that undeniably is in their long term common interests but involves punitive actions targeted at those who have more clout.

2008 Mar 20 09:58 AM

[phdinsuntan...:]

“Obviously the financial market crisis is now more serious and more global than a week ago”?? the public perception of some banks bad risky bets is public now

2008 Mar 20 10:50 AM

[employed ab...:]

It is interesting to read this post several months after the fact. Turns out that the ecomic crisis was worse than all but a few predicted. The part where he mentioned how serious the situation was getting then is almost laughable compared to where we are now. Months later and we are still on a downturn...

Mar 25 10:34 PM