IMF managing director Christine Lagarde has been in the “stop the austerity” camp for a little while now, but this was perhaps her most explicit statement yet on the policy that’s gradually killing off Europe’s economy.
Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday [...]
The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Ms Lagarde said that, given this reassessment of the impact of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets, should growth disappoint.
“It’s much more appropriate to apply the measures and let the [automatic] stabilisers operate,” Ms Lagarde said. Automatic stabilisers allow for the lower tax revenues and higher benefit payouts associated with a weak economy. “That applies to pretty much all the countries, particularly in the eurozone, that are applying that policy mix.”
Ms Lagarde also said struggling European countries such as Greece and Spain should be given more time to reduce their budget gaps. “That is what I have advocated for Portugal, this is what I have advocated for Spain, and this is what we are advocating for Greece, where I said repeatedly that an additional two years was necessary for the country actually to face the fiscal consolidation programme that is considered.”
Lagarde would not even encourage Spain to request a bailout, saying that was “up to Madrid.” The European Central Bank, a partner to the IMF in the European “troika,” definitely wants Spain to seek a bailout, and submit to conditions that would include more austerity and so-called labor market reforms that would take rights away from what workers remain employed in the country.
Privately, the IMF may want Spain to go ahead, and Lagarde did say she still favors the euphemistically titled reforms. But calling for more austerity would contrast with the rest of Lagarde’s statement, and indeed the findings the IMF put out earlier in the week. The IMF got a well-deserved reputation over the past couple decades for forcing weak countries into bad lending deals that included austerity programs. You could maybe call Lagarde’s reversal a deathbed conversion.
At this point, I’m happy for the company in the “stop the austerity” camp. I guess Lagarde couldn’t argue for more needless suffering when her own organization found in a research paper that austerity hurts more than it helps. But even while explicit, this is pretty soft – just don’t do more damage, and extend the austerity over a longer time horizon. Lagarde remains well within the orbit of the “responsible adults” who have taken a torch to the Eurozone and refuse to put out the fire.