* China growth slower, but IMF does not see hard
* Europe should walk "middle path" in debt cuts, not stifle
* Germany needs to put up with higher inflation
BUDAPEST, Oct 3 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 Olivier
Blanchard said in an interview published on Wednesday.
Blanchard told Hungarian website Portfolio.hu, in an
interview conducted on Sept. 18, 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
"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.
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
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.