'You can't just run a country on constant unbalanced budgets'

Thu, Mar 7, 2013, 00:00

AUSTERITY:The International Monetary Fund’s rethink on the depth and pace of the spending cuts and tax hikes required of countries to which it lends – as signalled in its 2012 World Economic Outlook – is somewhat overplayed “by commentators and those who live off polemics and divisive debates”, Lagarde believes.

The fund is not in the business of being orthodox for the sake of being orthodox, she explains. “We are trying to be attentive to the economic reality and we are trying to learn from the process through which the economies are going and the process through which the fund is going,” she says.

This has led the IMF to revisit the actual consequences for growth of fiscal consolidation “to see whether there should be a little bit of leg-room or a bit more time”, according to Lagarde, although she still appears to cleave to the hawkish line of fiscal adjustment she took in her previous role as France’s minister for finance before taking over at the IMF in mid-2011.

“I was a little bit isolated as French finance minister. I was personally convinced we had to do more fiscal consolidation. But that is in the past. Fiscal consolidation is a necessity because you can’t just run a country on constant unbalanced budgets.

“When it [the budget] has been unbalanced for long periods of time or suddenly brutally unbalanced, as was the case for Ireland, then you move to adjust and you need to redress the trend. My sense is that, when in a recession, you need to do it gradually over time and anchor that determination to reduce the deficit and restore sanity to public finances in irrevocable medium-term decisions,” she says.

Sensible fiscal consolidation is a necessity for the European recovery that Ireland needs to cement its own recovery, she argues.

“And when I say sensible fiscal consolidation, it doesn’t have to be rushed and massive and brutal, because the whole of Europe is going through low growth following a mild recession,” she says.

The nuanced approach adopted by the IMF stands in contrast to the more dogmatic position of the European Commission. Her previous job and her current role presumably give Lagarde a unique insight into this dichotomy.

“We [the IMF] are not part of the political scene in Europe. We are advising, lending, providing technical assistance and doing surveillance. That is our mission. The commission is right in the middle of a lot of political tension. It [the commission] has observed over time that it has to be firm in order to obtain some results,” she says.

The commission’s position has evolved, she says. It has gone from being totally focused on nominal economic targets to moving in the direction of structural targets.

Italian election

Lagarde sidesteps the question of whether the outcome of the recent Italian election - where an anti-austerity and anti-Europe candidate polled strongly - might accelerate this process and bring the commission and, by inference, Germany closer to the IMF’s view.

“I would not comment on that. There has been a vote. The government will have to be formed; economic proposals will come out of that. It is too early to say. ”