  Structural reform fatigue is settling in, with electorates weary in both creditor and debtor countries to pursue tough measures to ensure medium-term fiscal consolidation and containment of the sovereign crisis in Europe. Moreover, financial markets remain jittery as the final outcomes of agreed commitments are not a foregone conclusion.   The risk of disorderly outcomes is high, and balance sheet repair, especially of those banks most exposed to the European periphery, should be bolstered. Hoping for the best is no substitute for preparing for the worst, and the markets are well  BIS central bankers’ speeches  1  aware of that. More extreme measures on debt restructuring might be unavoidable if fiscal transfers are ruled out and fatigue settles in debtor countries.   In an environment of financial uncertainty and fiscal retrenchment, monetary policy should remain supportive. Emerging Market Economies (EMEs) and smaller, financially stable AEs, are threading carefully in this uncertain environment, and as we saw a few years ago, it is unlikely that full decoupling will occur under most scenarios. The Fund’s advice should properly recognize that the rebalancing challenges are not the same across this heterogeneous group of economies; thus, an adequate level of differentiation in terms of policy advice is called for.
In this regard, we would like to note that:   If the external scenario should worsen significantly, many EMEs with flexible exchange rates and inflation-targeting regimes would have scope to adjust monetary policy, thanks to a timely process of raising interest rates to contain overheating risks. Going forward, these economies will be able to react flexibly to changing global circumstances in a context of anchored inflationary expectations.   Other EMEs have limited room for maneuver, as their economies have expanded beyond their potential output, with widening fiscal and external deficits, and thus today face the risk that external shocks might unhinge inflationary expectations and force pro-cyclical monetary and fiscal policy adjustments.   A third group of EMEs has maintained structurally high national saving rates throughout the expansion phase of the global cycle and might be subject to a natural deceleration as the global economy cools down. In these cases, undertaking reforms to boost domestic demand would help sustain both medium-term global rebalancing and short-term policy accommodation.   Economies that are being affected by high commodity prices, particularly LowIncome Countries (LICs), should strive to develop targeted policies to the most vulnerable groups through efficient cash transfers, instead of across-the-board subsidies. The international community should strive to support these efforts through similar measures, as demand subsidies or export constraints in non-LIC economies exacerbate commodity price pressures. Policy advice by the Fund should be tailored to these different groups of economies.