The IMF Advises Against Further Austerity Measures in Light of Poor Economic Growth

on Oct 11, 2012

Christine Lagarde, managing director of the International Monetary Fund (IMF), urged countries to put the brakes on austerity measures, which the fund sees as curbing global growth and worsening the economic situation.

**Less Austerity, More Automatic Stabilisers**
Earlier this week the IMF reduced its global growth forecast for this year and warned that governments are underestimating the damage done by fiscal austerity. If growth continues to disappoint it would make no sense for European peripheral economies to stick to their budget deficit targets without reassessing the impact this has to their output.

“It’s much more appropriate to apply the measures and let the [automatic] stabilisers operate. That applies to pretty much all the countries, particularly in the Eurozone, that are applying that policy mix.” said Ms Lagarde at the annual meeting of the IMF and the World Bank in Tokyo.
The “automatic stabilisers” in question refer to government budget policies including progressive income taxes, welfare spending and interest rates, which act to dampen fluctuations in the GDP. For instance, unemployment benefits increase as unemployment rises and feed through to consumer spending, eventually providing a boost to the job market.

**Spain and Greece’s Battered Economies**
!m[Lagarde Calls for Urgent Action to Tackle Europe’s Debt Problems](/uploads/story/560/thumbs/pic1_inline.png)According to Ms Lagarde, the European Commission should give more time to Spain and Greece to reduce their budget deficits: “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 to actually face the fiscal consolidation programme that is considered.”

Unfortunate news from Greece might be backing up the IMF’s claim that austerity fuels the recession in the country – unemployment in the struggling economy rose for the 35th consecutive month in July and reached the record high 25.1 percent up from 24.8 in June. Greek unemployment is more than double the average in the Eurozone, which stood at 11.4 percent in July.

On Wednesday Standard & Poor reduced Spain’s credit rating to the lowest investment grade level BBB-, which according to the agency reflected the significant risks to the country’s growth and the lack of clear direction in the Eurozone’s policy.
Spanish bond yields have fallen to 5.76 percent from their peak of 7.51 percent in July, prompting Prime Minister Mariano Rajoy to delay any formal request for assistance from the ECB. Since S&P’s rating cut to nearly junk-status, bond yields rose to a closing level of 5.87 percent on Wednesday after having touched 5.90 percent earlier in the session.
**Chinese Officials Boycott IMF Meeting**
Senior Chinese finance officials left the convention in Tokyo as tensions between Japan and China over a small outcrop of uninhabited islands intensify. Zhou Xiaochuan, governor of the People’s Bank of China, and Xie Xuren, China’s finance minister, have not given any formal reason for why they are sending deputies to substitute them in the meetings.
Ms Lagarde said China will “lose out” if its two top financial officials don’t attend and called on Beijing and Tokyo to quickly settle their dispute because “countries in this region are very important for the global economy”.


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