With world economy stuttering, governments urged to open purse

By Howard Schneider and Anna Yukhananov

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 world economy is on a stable footing. Germany is in danger of slipping into recession, China has slowed, and U.S. policymakers are concerned a fresh bout of global weakness will stymie the U.S. recovery as well.

International Monetary Fund Managing Director Christine Lagarde issued a blunt call on Thursday for the United States and Germany to open the taps and spend more on infrastructure, a stark reversal from the Fund's recent fixation on holding down government debt and lifting economies through "structural reforms" that have 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 governments 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.

After a burst of spending to combat the downturn, developed economies had turned to tightening their belts and there is little sign political consensus will emerge in Washington for pump priming, let alone in Germany where the top priority is a federal budget that is in the black, or fully balanced, in 2015.

German Finance Minister Wolfgang Schaeuble on Thursday dismissed the idea of "writing checks" in Europe to bolster growth even as Europe's largest economy, which contracted by 0.2 percent in the second quarter, faces the prospect of flatlining in the third quarter and weakening into 2015.

"As soon as France and Italy implement substantial structural reforms, the situation in Europe will change," he said in Washington ahead of the fall meetings of the IMF and World Bank.

FILLING POTHOLES

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 liberalization and structural reform, touted as necessary to boost global growth, have 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.

The IMF has couched its advice in typically prudent terms: 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 said 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; Writing by Howard Schneider and David Chance; Editing by Paul Simao and Tim Ahmann)