Though the ongoing crisis in Europe dominated Chrystia’s interview with Dominique Strauss-Kahn last Thursday, the IMF head has much to say about the economic outlook for the United States. He believesthe biggest issue facing the U.S. right now is growth — not deficits — although he added that America needs a medium-term plan for fiscal consolidation.
Last week’s passage of the tax compromise should raise America’s growth prospects, but in response to a question about whether the tax cuts on high-earners are stimulative, Strauss -Kahn said, “of course not”.
When asked about the Federal Reserve’s latest round of quantitative easing, Strauss-Kahn endorsed the move, saying it will restore growth both outside and inside the U.S.:
That the American economy is so one quarter of the global economy. And has a role, which is bigger than this 25%. So what’s going to happen in the American economy in 2011 and 2012 has a lot of consequences on the rest of the world. So we have to look the kind of policy which is implemented here not only having in mind the effect of the US economy itself but also the spillover under rest. And that’s why people may have sometime the mixed view. They say, oh, it may help the US economy but on the other hand this can quantitative easing, number two, creates problems to the others because there’s too much liquidity in the world and so on, which is true. But the other hand, what’s the alternative, if the US economy doesn’t grow enough then the consequences under the rest of the world are also very, very bad. So I think that what the authorities are doing goes in the right direction.
QE2 has been fairly unpopular outside the United States. Perhaps more worryingly, Strauss-Kahn thinks the coordination between the major world economies that was fostered at the depths of the financial crisis has now faded away: