With world economy stuttering, governments urged to open purse

WASHINGTON (Reuters) - World economic leaders are being urged to rally around a plan to let government do what it does best ? spend money ? in an effort to buoy a global economy that remains slack and slowing.

The effort comes as six years of crisis fighting have lapsed with little guarantee the global economy is on a stable footing. Even Germany is in danger of slipping into recession, China has slowed, and U.S. policymakers are concerned a fresh world slowdown will stymie the U.S. recovery as well.

International Monetary Fund managing director Christine Lagarde made a blunt call on Thursday for the U.S. and Germany in particular to open the taps and spend more on infrastructure projects ? a stark reversal from the fund?s recent fixation on government debt and "structural reform" that has proved politically difficult to implement.

"It is a question of doing it, not just talking about it," Lagarde said.

Her comments, and the rallying of top nations around the idea that government should begin spending again to boost growth and create jobs, comes amid recognition that the vast response of the past six years has not cured the world from the hangover of the Great Recession.

Developed economies have undertaken large fiscal adjustments and there is little sign political consensus will emerge in Washington for pump priming, let alone in Germany, the engine of the euro zone, where the top priority is to deliver on its promise of a federal budget that is in the black, or fully balanced, in 2015.

Historically loose monetary policy has pumped trillions of dollars into world markets, but much of the money remains idled as bank reserves or corporate cash holdings and too little has translated into investment and household spending. Trade and structural reform, touted as necessary to boost global growth, has proved too politically difficult to make a difference.

The aim now is to use an old-fashioned tool ? the public purse ? to step in where households, the private sector, banks and others have not.

"There has been a big drop in aggregate demand. Someone has to fill that gap," IMF Deputy Managing Director Min Zhu said at a panel as world finance ministers and central bankers here gathered for the IMF and World Bank fall meetings.

The IMF has couched its advice in typically prudent terms ? that wise investments in infrastructure could boost jobs and growth in the short run, and pay for themselves over time by raising productivity and long-run economic potential.

Officials have estimated that developing nations like India and Brazil need trillions of dollars in capital spending in their own right, with Brazil often cited as a country whose economic growth is being hampered by an inefficient road and port system.

Economists at a panel on growth and government spending on Wednesday cited the United States as a developing nation whose roads, bridges and airports could use a facelift, improving growth and creating jobs in the near-term.

"We are looking at protracted low growth. There is a role for fiscal policy to play," said IMF Deputy Managing Director Naoyuki Shinohara, who added that even countries with high debt could find room to borrow for good projects. "There is fiscal room to be realized."

(Additional reporting by Krista Hughes and Leika Kihara; Editing by David Chance and Paul Simao)

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