Austerity measures come under fire
The IMF is settling on something of a third way, writes Annie Lowrey.
In the last year, the International Monetary Fund has reassessed how it thinks austerity harms a weak, financially troubled economy. But while warning of the perils of slow growth, it still often insists on austerity for just such economies.
The tension between those realities will be on full display in Washington this week, as economic officials from around the world gather for the spring meetings of the IMF and its sister institution, the World Bank.
Once again, sluggish growth in advanced economies, and the troubles in the eurozone, will be the central topic of discussion.
Officials agree that most countries, particularly in Europe, desperately need more growth. But they remain sharply divided on how to get it.
Those influenced by the Depression-fighting thinking of John Maynard Keynes want an easing of austerity measures, more expansionary monetary policies and even stimulus. But powerful northern European officials, including those from Germany, have argued that balanced budgets and fiscal consolidation are a prerequisite for restoring sustainable growth.
In a somewhat dissonant posture, the IMF has split the difference: reassessing its views on austerity, pushing strongly for aggressive measures to bolster growth but all without repudiating its existing programs.
"We believe that for most European countries, fiscal consolidation is a must, simply given the level of debt," said Christine Lagarde IMF managing director. But she qualified that statement by saying not all cuts needed to be "brutal or abrupt or massively front-loaded".
"There is a balance to be had between how much is called for and how much is tolerable," she said.
Economic fortunes during the recovery from the global financial crisis have diverged, with new IMF estimates of growth expected this week. But they will not change the basic picture that Ms Lagarde has taken to describing as a "three-speed" world.
Developing and emerging economies are growing apace. Some advanced economies, including the US, are gaining strength. But a third category of countries remains mired in stagnation or recession.
Japan has struggled with a stalled economy, but has recently engaged in a campaign of fiscal and monetary stimulus. The true laggard is Europe, suffering from rising unemployment and another bout of economic contraction - seemingly without the political consensus or economic mechanisms to tackle those problems.
"The European Union's pre-crisis growth performance was disappointing enough, but the performance has been even more dismal since the onset of the crisis," the European research group Bruegel concluded in a recent report, saying weak growth was undermining efforts to reduce debt. "Low growth is making it much tougher for the hard-hit economies in southern Europe to recover competitiveness and regain control of their public finances."
Bruegel concluded that a failure to turn things around might render Europe's social contract "unsustainable".
In light of that reality, the IMF and its European partners, the European Commission and the European Central Bank have come under fire for the austerity measures imposed on countries including Spain, Portugal and Greece, where unemployment rates extend well into the double digits. The criticism has become louder since the IMF said it had determined austerity had a far worse impact on weak economies than it once thought.
Political and financing constraints continue to plague the euro rescue plans. Moreover, the IMF was only one partner in the troika, experts noted.
"When you look at the IMF, you can't consider it truly a technocratic organisation making decisions based only on the economics," said Simon Johnson, a former chief economist at the IMF. "You've got to see it working in a political setting, and it can't go in its own direction against the will of its major shareholders."
The IMF and its international partners have pushed for more expansionary policies in the stronger countries of Europe to counter the austerity in the eurozone periphery. The IMF and the US intend to continue that push at the coming spring meetings.
Policies have been proposed to help promote growth across the eurozone and around the world.
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