Ten more years of pain: World economy will stay in crisis for at least another decade, says IMF chief economist

  • Olivier Blanchard  was speaking to Hungarian website Portfolio.hu
  • He said Germany  would have to accept higher inflation and a real strengthening of its purchasing  power
  • He said U.S.  still has big problems to solve
  • Japan’s  crisis ‘may take decades to solve’

By Matt Blake

PUBLISHED:09:24 EST, 3  October 2012| UPDATED:09:27 EST, 3 October 2012

Bleak prediction: Olivier Blanchard said Germany would have to accept higher inflation and a real strengthening of its purchasing power as part of the solution to Europe's problemsBleak prediction: Olivier Blanchard said Germany would  have to accept higher inflation and a real strengthening of its purchasing power  as part of the solution to Europe’s problems

The world economy will take at least 10 years  to emerge from the financial crisis that began in 2008, the International  Monetary Fund’s Chief Economist has said.

Olivier Blanchard told  Hungarian website Portfolio.hu that Germany would have to accept higher  inflation and a real strengthening of its purchasing power as part of the  solution to Europe’s problems.

But even though the focus was on Europe’s  troubles now, he said, the United States also had a fiscal problem which it had  to resolve.

‘It’s not yet a lost decade… But it will  surely take at least a decade from the beginning of the crisis for the world  economy to get back to decent shape,’ Blanchard said.

‘Japan is facing a very difficult fiscal  adjustment too, one which will take decades to solve. China has probably taken  care of its asset boom but has slower growth than before, but we do not forecast  any really hard landing,’ he added.

Blanchard said that adjustment in the euro  zone required a decrease in prices in the bloc’s indebted southern half and a  rise in core countries.

For the European Central Bank to maintain 2  percent inflation for the bloc as a whole, core states would have to have higher  inflation than 2 percent – something strongly resisted in Germany, where 1920s  hyperinflation still haunts the popular debate on interest rates.

‘A somewhat higher inflation rate in Germany  should simply be seen as a necessary and desirable, relative price adjustment,’  Blanchard said.

‘Given overall demand conditions and the  ECB’s strong mandate to ensure price stability, this is not the beginning of  hyperinflation,’ he said.

Price control: Blanchard said that adjustment in the euro zone required a decrease in prices in the bloc's indebted southern half, such as Greece (pictured) and a rise in core countries 

Price control: Blanchard said that adjustment in the  euro zone required a decrease in prices in the bloc’s indebted southern half,  such as Spain and Greece (pictured), and a rise in core countries

On the debt crisis, Blanchard said that debt  reductions were unavoidable but it should be done without stifling growth,  walking on a ‘narrow middle path.’

‘If you do it too slow, the market thinks  you’re not serious, if you do it too fast, you kill the economy. For each  country you have to find the right path of consolidation,’ he said.

He said inflation-targeting had serious  limitations and using just the main policy rate was not enough.

‘You can have an economy in which inflation  is stable and low, but behind the scenes the composition of the output is wrong,  and the financial system accumulates risks.’

‘The way to think about monetary policy in  the future is that the central bank has in effect two sets of tools,’ he said.

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