Lagarde criticised for stance on euro zone crisis

Fri, Oct 12, 2012, 01:00

HIGH-LEVEL SPLITS over the handling of the euro zone crisis burst into the open yesterday when Germany’s finance minister rebuked the head of the International Monetary Fund after she warned that EU leaders should ease demands for tighter austerity in peripheral economies.

Wolfgang Schäuble said Christine Lagarde had appeared to contradict the IMF’s own stance in advocating an easing of austerity, noting that the fund had “time and again” warned that high debt levels threatened growth.

“When there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction,” Mr Schäuble said. “When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher.”

Mr Schäuble spoke on the sidelines of a meeting of finance ministers and central bankers in Tokyo just after Ms Lagarde, the IMF managing director, backed a new study that found Brussels and the IMF had consistently underestimated the impact of austerity measures on economic growth during the euro zone crisis.

Ms Lagarde said euro zone countries should not blindly stick to tough budget deficit targets if growth weakens more than expected. She argued that they should allow “automatic stabilisers” – higher welfare spending and lower tax revenues – to kick in if the economy deteriorated.

“It is sometimes better to have more time,” Ms Lagarde said, noting that if countries tried to cut their budgets simultaneously it could multiply austerity’s impact.

The IMF’s warnings against an over-reliance on austerity came as German chancellor Angela Merkel held out the prospect of government action, including possible tax cuts, to stimulate domestic demand. Dr Merkel said she was determined to revive Germany’s flagging growth, not least because of the country’s role “to do something for the stimulation of the economy in Europe”.

Euro zone leaders have called for tougher austerity measures in both Spain and Greece, even as their economies shrink rapidly. Ms Lagarde advocated giving Greece two more years to hit the tough budget targets contained in its €174 billion bailout programme.

Europeans, including Irish people, are braced for a new age of austerity as governments across the region take action to eliminate unsustainable budget deficits.

Her call for slower adjustment, coupled with a highly symbolic visit to Athens by Dr Merkel is a boost to Greece, which is trying to persuade its euro zone partners to give it more time. However, slower deficit reduction in Athens would mean Greece’s international creditors would have to give it more help in a fraught overhaul of Greece’s bailout programme.

– Copyright The Financial Times Limited 2012