By Max Clarke

“Sovereign debt, growth, and social instability” are the three major challenges facing the global economy today.

Addressing the Council of Foreign Relations on her 22nd day as Managing Director of the International Monetary Fund, Christine Lagarde outlined the nature and scale of threats to a worldwide economic recovery.

For debt to be sustainable, spoke Lagarde, it must be reinforced by strong underlying growth; and for growth to be achieved, it must be delivered by a stable and equitable society.

Troubles on the periphery of the Eurozone have been met by cooperation among creditor states along with ‘political courage’ amongst Europe’s leaders. Echoing the UK’s Business Secretary, Vince Cable’s attack on ‘right wing nutters’ in the US impeding raising the debt ceiling, Lagarde blasted the mounting debt as the greatest threat to fiscal stability:

“I’m hopeful that the political courage shown by European leaders will soon be followed by bold fiscal action in the U.S. On the debt ceiling, the clock is ticking, and clearly the issue needs to be resolved immediately. Indeed, an adverse fiscal shock in the United States could have serious spillovers on the rest of the world.

“But more fundamentally,” continued Lagarde, “a credible fiscal adjustment plan is needed sooner rather than later. In Japan also, even though the situation is not as urgent, more ambitious measures are needed to deal with the very high level of public debt.”

Lagarde proceeded to note that hastily curtailing US debt would create a backlash that risked stunting the global economy. A cut of just 1% to the 8 trillion US debt mountain would slow world economic growth by ½ a percent over 2 years.

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