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BUDAPEST (Reuters) - 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 September 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 to resolve.
"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 said.
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.
Reporting by Krisztina Than