PARIS (Reuters) - Governments should be ready to increase their spending on economic stimulus programs if circumstances require it, the International Monetary Fund's chief economist Olivier Blanchard said in comments published on Tuesday.
In an interview with French daily Le Monde, Blanchard called on Germany in particular to boost its spending in the next few months as some of its European partners such as France have called for.
"The coming months will be very bad. Halting this loss of confidence, providing stimulus and, if necessary, replacing private demand are essential if we want to prevent the recession from becoming a Great Depression," Blanchard told Le Monde.
Blanchard said the IMF was sticking to a target of 2 percent of global gross domestic product for the fiscal stimulus required, but warned that more may be needed.
"If the circumstances require it, states must be ready to do more, 3 percent or more if necessary," he said, adding: "We must think about it now because it is not easy to spend such large sums of money efficiently."
Germany has been criticized by some other European countries, particularly France, for not being prepared to spend more on an EU-wide stimulus program to kickstart growth as the global financial crisis hits the real economy.
Berlin says it will review its stimulus program in January to see if more spending is necessary.
"The important thing is to support activity and boost confidence now. The coming six months are of capital importance," Blanchard said.
"If Germany did not participate sufficiently in this stimulus, many other countries would also hesitate to do so and the effect would be disastrous for Europe."
FIXING THE BANKS
Blanchard also criticized Britain's decision to cut value-added tax by 2.5 percentage points, saying it would not influence consumers' behavior significantly.
"Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea -- 2 percent less is not perceived by consumers as a real incentive to spend," he said.
By contrast, he said a French measure aimed at encouraging people to buy cars was a good idea.
Overall, it was better to stimulate growth by boosting public expenditure rather than by cutting taxes at a time when households tended to increase their savings, he said.
Other tools needed to kickstart the economy included monetary policy and measures to repair the financial system given banks were still reducing their lending to individuals, companies and emerging markets, he said.
To address financial system concerns, banks should recognize their losses and clarify the state of their balance sheets.
"They are doing this no doubt, but too slowly, something that is introducing uncertainty and continuing to worry investors," he said.
Governments could help lenders as they worked toward such goals by prodding or forcing them to spin off toxic assets.
Once such steps were taken, many banks would be seriously undercapitalized, making it necessary for governments to step in and take stakes if private investment proved inadequate.
States should also stand ready to step in if it took too long for credit market activity to return to normal.
Governments could purchase commercial paper as the U.S. Federal Reserve had done during the crisis, he said.
(Reporting by Francois Murphy and Tamora Vidaillet; editing by David Stamp and Andy Bruce)
