Why does Lagarde warn against sudden withdrawal of pandemic support?

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Lagarde Warns Against Abrupt Withdrawal of Pandemic Support to Prevent Economic "Cliff Effect"

Christine Lagarde has cautioned governments against prematurely discontinuing pandemic-related support measures, emphasizing the necessity of a gradual phase-out to facilitate a smooth economic recovery. Her primary concern is the potential for a "cliff effect," a sudden and detrimental economic downturn that could occur if fiscal policies, such as furlough or short-time work schemes, are terminated abruptly.
Risk of a "Cliff Effect"

Lagarde articulated that the sudden cessation of economic support, including measures like furlough or short-time work schemes implemented during the pandemic, poses a significant risk. This abrupt withdrawal could lead to a sharp decline in economic activity, termed a "cliff effect," hindering the fragile recovery process.
Need for Continued Economic Support

The European Central Bank president argued that economic support mechanisms should remain in place for an extended period. This continuation, even as the pandemic recedes, is crucial for ensuring a seamless transition from crisis management to a robust economic recovery, preventing a sudden shock to businesses and individuals.
Facilitating a Smooth Transition

Lagarde's recommendation centers on the careful tailoring of fiscal policies to avoid abrupt changes. By maintaining support for a transitional period, governments can help cushion the economic impact and allow businesses and workers to adapt gradually, thereby fostering a more stable and comprehensive recovery from the crisis.

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Why does Lagarde warn against sudden withdrawal of pandemic support?

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