Looks like the IMF top brass are not changing their tune on austerity after all

11 Oct

FT clarifies things: simply because you dont agree with Merkel does not mean that you walked out the austerians’ big tent. That applies to the IMF’s wave-maker from yesterday, As we await the predictable Schauble rebuke, here the FT line:

“At a time of fierce debate on how best to reignite the recovery – in individual countries and internationally – the International Monetary Fund has emerged as a respected arbiter of economic policies. When Christine Lagarde, the IMF’s chief, warned against possible excesses of austerity this week, it was bound to cause waves.

Ms Lagarde’s words, and those of the fund’s technical staff, should be pondered not pounced on. Not just because there can be no doctrine of IMF infallibility: like most other forecasters it has been proven over-optimistic on the strength of the recovery. But also because the fund’s message is consistent with, not contrary to what it has been saying for some time.

Ms Lagarde repeated the advice she has given before, and with which this newspaper agrees. Countries should stick to their
deficit-cutting policies, but not to nominal targets. Deficit-reduction outcomes may slip in the face of a worse slowdown than expected, but policies should not – nor should new cuts be put in place to “catch up”. Governments with fiscal breathing room should avoid cutting, while those without it must cut at the right pace. In particular, Greece should be given the two more years it is asking for. In the UK, further monetary stimulus and better targeting of taxes and public spending must come before any fiscal relaxation unless growth prospects deteriorate further.

Much is being made of the IMF’s new estimates of “fiscal multipliers” – the link between fiscal policy and economic growth. These, the fund finds (though from a disappointingly rough analysis), were greater in the past few years than in the preceding decades. Olivier Blanchard, the IMF chief economist responsible for the findings, attributes them to the cumulative damage of many states cutting deficits simultaneously and to insufficient monetary accommodation as conventional policy has run out of road. This, too, is consistent with past and present advice. It is a mistake to take the new IMF numbers as a call for fiscal stimulus, as Mr Blanchard himself strongly underlined in an interview with the German press.

That the IMF is not changing its tune does not mean it need not be listened to. The eurozone in particular should heed Ms Lagarde and Mr Blanchard’s calls for a banking union and for making the monetary union’s fiscal ideology more growth-friendly. Overhasty consolidation in the periphery and a lack of balancing moderation in the core is hurting not just Europe but the whole global economy.

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