Lagarde urges US leaders to break fiscal cliff deadlock

Christine Lagarde told the BBC's Katty Kay there would be ripple effects worldwide if the US went over the fiscal cliff

Christine Lagarde has urged US leaders to reach a deal to avoid the "fiscal cliff", warning that the uncertainty was damaging the global economy.

The head of the International Monetary Fund told the BBC that the US had a duty "to try to remove uncertainty and doubt as quickly as possible".

The fiscal cliff refers to US tax rises and spending cuts set to automatically come into force in January.

They can only be avoided if Democrats and Republicans agree a budget deal.

Ms Lagarde said: "The US has an economic leadership in the world, [the dollar is] an international reserve currency, and a safe haven.

"To protect that, to make sure that leadership endures, this uncertainty has to be removed, because uncertainty fuels doubt as to that leadership."

She added: "The US is about 20% of the global economy. If the US suffers as a result of the fiscal cliff, a complete wiping out of its growth, it is going to have repercussions around the world.

"If the US economy has 2% less growth there will be 1% less growth in Mexico and China… there will be ripple affects outside of the US."

'Reckless talk'

On Wednesday, US President Barack Obama, a Democrat, and Republican House Speaker John Boehner spoke by telephone in an effort to break the continuing deadlock.

What is the fiscal cliff?

  • Under a deal reached last year between President Obama and the Republican-controlled Congress, existing stimulus measures - mostly tax cuts - will expire on 1 January 2013
  • Cuts to defence, education and other government spending will then automatically come into force - the "fiscal cliff" - unless Congress acts
  • The economy does not have the momentum to absorb the shock from going over the fiscal cliff without going into recession

Both sides have proposed plans to reach a deal, but they remain divided over how to reach it.

President Obama wants to see tax rises on wealthy Americans, but Republicans object, calling instead for larger government spending cuts.

On Friday, Mr Boehner accused Mr Obama of adopting a "my way or the highway" approach and engaging in "reckless talk" about going over the fiscal cliff.

"This isn't a progress report because there is no progress to report," Mr Boehner told reporters at the Capitol.

"The president has adopted a deliberate strategy to slow walk our economy right to the edge of the fiscal cliff."

Correspondents say the White House currently has the upper hand, given that Mr Obama has just won re-election and that opinion polls show that Americans would blame Republicans if the US went off the fiscal cliff.

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