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IMF meeting heralds shift away from austerity

October 14, 2012

People's Bank of China Deputy Governor Yi Gang, Per Jacobsson Foundation Chairman Guillermo Ortiz and International Monetary Fund (IMF) Deputy Managing Director Nemat Shafik attend the Annual Meetings of the IMF and the World Bank Group in Tokyo October 14, 2012.—Reuters Photo

TOKYO: The curtains came down Sunday on IMF and World Bank meetings that were dominated by a gathering row over whether austerity or growth should come centre stage as the world economy seeks a reboot.

The International Monetary Fund – criticised in the past for its strict prescription of the bitter medicine of deficit cuts – used the week to articulate a moderated position emphasising growth.

That brought its Managing Director Christine Lagarde into conflict with champions of austerity, in the person of German Finance Minister Wolfgang Schaeuble, who insisted there was “no alternative” to budget-slashing.

The dispute was the centrepiece of events in Tokyo, as they jockeyed over how strict to be on countries with runaway deficits.

Lagarde caused a stir on Thursday when she said she was happy for Greece – bleeding from the spending cuts demanded by international creditors – to have two more years to meet its deficit-reduction targets.

The following day, Schaeuble said there was “no alternative” to slashing bloated national balance sheets, demands to which Athens and other troubled eurozone capitals have agreed in exchange for multi-billion euro bailouts.

On Saturday both insisted they were on the same page.

“We are in complete agreement with the IMF, and especially with Ms. Lagarde, that in a mid-term view the reduction of too-high debt levels is completely unavoidable,” Schaeuble told reporters.

As they sought to paper over the cracks, Lagarde told a separate news conference that talks of a split were over-done.

“In reality, what has been presented as disagreement is more about perception than reality,” she said.

“We all recognise that credible, medium-term fiscal adjustments are necessary in all advanced economies... (but it must) be calibrated on a country-by-country basis... it cannot be one-size-fits-all.” Calls for moderation in the pace of fiscal tightening have grown over recent months, with sometimes-violent street protests in debt-laden European countries as joblessness grows and social welfare programmes are trimmed.

There are also escalating fears that cuts are a drag on the global economy.

The IMF’s latest world economic growth forecast topsliced the rate of growth for the year to 3.3 per cent, down from its July estimate of 3.5 per cent.

At a press conference at the start of the week, just after the growth estimates were announced, IMF chief economist Olivier Blanchard telegraphed the apparent shift in Fund thinking.

“In most countries, fiscal consolidation is proceeding according to plan, and while consolidation is needed, there is no question that it is weighing on demand and, therefore, on output,” he told reporters.

Blanchard said the IMF’s advice had always been that budget adjustments had to be made over time, to avoid shocks to the economic system.

“This has the implication that if growth turns out to be worse than expected, the country does not have to take additional fiscal measures, which could make things worse.

“I think that when the case is there, we have to be ready to readjust the targets,” he said.

Less tightening, more easing, then? Yes and no, said Lagarde, who in a lecture Sunday insisted the easing that was good for the developed world could cause overheating and asset bubbles in emerging economies.

“Accommodative monetary policies... could strain the capacity of those economies to absorb the potentially large flows and could lead to overheating asset price bubbles,” she said.

Critics in emerging nations have argued that easing measures, particularly in the United States, have driven down the value of the dollar and sparked huge capital flows to spill across their borders, raising the risk of overheating and driving up national currencies.

Lagarde, juggling the competing demands of advanced and emerging economies, switched tack in the latter half of the speech.

“We have seen several bold initiatives by major central banks certainly that the IMF highly praises and values as major contributing factors to stability,” she said.

“These are big policy actions in the right direction. Indeed central bankers must play a significant role in pulling the global economy out of the current malaise.” But, she acknowledged: “there are diverging views within and across countries” and talking is the best way to get over that problem.

“Given the cross-border spillover effect of monetary policy decisions, central banks may need to step up their international dialogue and cooperation,” she said.