Germany and the IMF Clash over Austerity

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on Oct 12, 2012

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Germany and the IMF Clash over Austerity

The difference in approaches toward handling the Eurozone crisis was highlighted at a meeting of finance chiefs and central bankers in Tokyo, with Germany’s finance minister Wolfgang Schäuble criticising the head of the International Monetary Fund (IMF), the Financial Times reported on 11 October 2011. Christine Lagarde, IMF’s managing director, noted that EU leaders should ease demands for tighter austerity in peripheral Eurozone economies.

**Wolfgang Schäuble Rebukes Christine Lagarde**
Mr Schäuble criticised Ms Lagarde by saying that she had appeared to contradict the IMF’s own position in advocating austerity easing given that the IMF had warned “time and again” that high debt levels were a threat to economic growth. “When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher,” the German finance minister commented, as quoted by the FT.

Mr Schäuble’s mountain metaphor came after Ms Lagarde backed a new study which indicated that both Brussels and the IMF had underestimated the negative impact of austerity measures on economic growth during the Eurozone debt crisis. Ms Lagarde advocated having “automatic stabilisers” such as higher welfare spending and lower tax revenues which could kick in if the economy deteriorated, rather than blindly sticking to tough budget deficit targets. “It is sometimes better to have more time,” said Ms Lagarde, as quoted by the FT. She also noted that the simultaneous cutting of budgets could multiply austerity’s impact on the economy.

**Ms Lagarde Backs Greek Request for More Time**
In practical terms, Ms Lagarde’s remarks refer to countries such as Greece and Spain and counter the position of Eurozone leaders who have called for tougher austerity measures. Ms Lagarde supported Greece’s request for more time to hit the tough budget targets set in the country’s bailout programme and suggested that debt reductions might be needed before the bailout could proceed.

!m[](/uploads/story/568/thumbs/pic1_inline.png)Bloomberg reports that Mr Schäuble, however, pointed out that European governments could not accept losses on their Greek debt holdings, adding that in the case of a “medium-term goal, it doesn’t build confidence when one starts going in a different direction.”
In addition, Ms Lagarde backed the decision of the European Commission to grant Spain an additional year to lower its budget deficit to three percent of economic output. Ms Lagarde, however, did not comment on whether the country should ask for additional financial assistance. Both Greece and Spain will be among the topics of discussion at an upcoming EU summit.

**Europe’s Efforts Praised**
Meanwhile, Europe’s efforts to counter the crisis did not pass unnoticed, with Bloomberg reporting that international finance ministers and bankers praised the policy measures of the European Central Bank (ECB). Timothy F. Geithner, secretary of the US Treasury Department, noted that the Eurozone was on a “much more powerful, promising path.” Brian T. Moynihan, Bank of America’s (NYSE:BAC) CEO, told Bloomberg TV that although the turmoil was going to “ebb and flow”, it was in a “pretty good equilibrium.” In an interview, Gary Cohn, president and chief operating officer of Goldman Sachs (NYSE:GS) praised the ECB, noting that it had “removed a lot of risk off the table.”
And while the praise of bankers and finance chiefs suggests that Europe has so far adequately addressed the turmoil, the high-level difference in views as regards the next steps is an indication that it is less clear how the EU should climb the rest of the debt mountain.