Greece, Spain and the euro zone’s slow progress toward debt reform took centre stage at IMF meetings on Friday despite Europe’s best effort to remove itself from the spotlight.
The International Monetary Fund recommended that some of Europe’s debt-burdened countries take a bit more time to reduce budget deficits, arguing that moving too fast 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 against that advice and said reversing course on promised deficit reductions would only 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 U.S. fiscal troubles too. “Europe is not the source of all problems in the world,” he told reporters at a briefing on Friday.
The primary focus is on Greece, which has missed a series of debt reduction targets, and Spain, which is under pressure to seek a bailout as it struggles to rein in central government spending, get a grip on regional debts and recapitalise banks.
IMF Managing Director Christine Lagarde said on Thursday that both countries should be given more time to make needed fiscal adjustments.
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 economic growth more sharply than previously thought.
