Germany held firm yesterday in insisting it was too soon to say Greece deserved more time to meet its budget-cutting goals even as the head of the IMF laid out the case for leniency.
Greece, Spain and the eurozone’s slow progress toward debt reform was centre stage at International Monetary Fund meetings despite Europe‘s best effort to step out of the spotlight.
IMF managing director Christine Lagarde, sitting next to Germany‘s Finance Minister, said Athens needed more breathing space.
“Given the... lack of growth, given the market pressure, given the efforts that have been undertaken, a bit more time is necessary,” she said, amplifying on remarks made on Thursday.
In a softening of earlier advice, the IMF has argued that forcing Greece and other debt-burdened countries in Europe to reduce their deficits too quickly is counter-productive because it hurts the economy.
The shift was welcomed by some emerging market countries as well as long-time critics who say that the tough conditions attached to IMF loans inflict undue economic pain and make it harder for countries to grow their way out of debt.
“We have been arguing for some time that single-minded and draconian fiscal policies may be counterproductive and have a tendency to backfire,” said Brazilian Finance Minister Guido Mantega.
But Germany, Europe‘s largest creditor country and the key to any lasting fiscal reforms, pushed back and said reversing course on promised deficit reductions would weaken credibility. Finance Minister Wolfgang Schaeuble said Europe had made plenty of crisis-fighting progress, echoing comments from other European officials who said there should be greater attention paid to US fiscal troubles.
He criticised Lagarde for calling for flexibility even before the ‘troika’ of Athens‘s lenders – the IMF, the European Union and the European Central Bank – wrap up a review of their €130 billion bailout programme for Greece.
“Until we have the troika report, we must not speculate,” he said.
Lagarde and Schaeuble shared the stage as part of a panel discussion, their first public joint appearance since the IMF head surprised investors on Thursday by stating unequivocally that Greece and Spain needed more time.
Spain‘sEconomy Minister Luis de Guindos said there was “absolutely” no political resistance from within the eurozone to a Spanish bailout request, an apparent reference to Germany. Spain is under pressure to seek a bailout as it struggles to rein in central government spending.
US officials have expressed support for giving European countries extra time to deal with their debt.
In Lisbon, Portugal‘s Prime Minister Pedro Passos Coelho said his country was adjusting austerity measures to reality so it would not have to request more rescue funds.
But Italy‘s Economy Minister, Vittorio Grilli, said in Tokyo the economic pain from fiscal consolidation was “a necessary price to have for a much brighter future in the medium and long term.” Even as the eurozone debt crisis rages, the European Union was awarded the Nobel Peace Prize.
“Despite some gloom in the economy in Europe, still this is a great day for Europe,” said Olli Rehn, the EU’s Economic and Monetary Affairs Commissioner.
The IMF’s change of tune on the speed of budget cuts stems from research it released this week showing that aggressive fiscal consolidation crimps growth more sharply than previously thought.
It also reflects a desire by Lagarde, a former French Finance Minister, to demonstrate the IMF is willing to get tough with Europe. Big emerging economies, who have helped top up the IMF’s crisis-fighting coffers, had worried about the Fund’s independence.
“Let us not delude ourselves: without growth, the future of the global economy is in jeopardy,” she said. “One lesson is clear from history: reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth,” she said. (Reuters).