By Peter Schroeder - 07/26/11 02:54 PM EDT
Lagarde said that in addressing their own debt crisis, European leaders have shown just the type of courage the United States needs to tackle its own problems.
She did, however, warn that major efforts to rein in the deficit could also stifle economic growth. IMF research has found that for every one percentage-point cut to the deficit, it could lower economic growth by half a percentage point over two years.
With this in mind, she pushed a plan that would mandate deficit-reduction efforts now but not have those efforts take place until later in the future, when the economic recovery has more momentum.
Once a nation takes on its deficit, it can expect to reap the benefits over the long term, she argued. Reducing a nation's debt burden can reduce the cost of borrowing, which in turn can free up space to cut taxes.