Bleak Prospects For 2012

Opinion: (Olivier Blanchard, the IMF Chief Economist): “We started 2011 in recovery mode, admittedly weak and unbalanced, but nevertheless there was hope.

“Yet, as the year draws to a close, the recovery in many advanced economies is at a standstill, with some investors even exploring the implications of a potential breakup of the Eurozone, and the real possibility that conditions may be worse than we saw in 2008.

“I draw four main lessons from what has happened.

  • First, post the 2008–09 crisis, the world economy is pregnant with multiple equilibria—self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications.
  • Second, incomplete or partial policy measures can make things worse.
  • Third, financial investors are schizophrenic about fiscal consolidation and growth.
  • Fourth, perception moulds reality.

“Put these four factors together, and you can explain why the year ends much worse than it started.

“Is all hope lost? No, but putting the recovery back on track will be harder than it was a year ago. It will take credible but realistic fiscal consolidation plans. It will take liquidity provision to avoid multiple equilibria. It will take plans that are not only announced, but implemented. And it will take much more effective collaboration among all involved.

“I am hopeful it will happen. The alternative is just too unattractive.”

Related Material:
Building The World On A New Basis
Joseph Stigliz: The World At The Brink Of A New Chaos

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