Lagarde urges Europe to put a brake on deep budget cuts

 
City A.M. Reporter
THE INTERNATIONAL Monetary Fund (IMF) has backed giving debt-burdened Greece and Spain more time to reduce their budget deficits, cautioning that cutting too far, too fast would do more harm than good.

But Germany pushed back and said back-tracking on debt-reduction goals would only hurt confidence, a stance that suggested some disagreement between the IMF and Europe’s largest creditor country.

“The IMF has time and again said that high public debt poses a problem,” German finance minister Wolfgang Schaeuble said. “So when there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction.”

“When you want to climb a big mountain and you start climbing down then the mountain will get even higher.”

The IMF released new research this week showing that fiscal consolidation has a much sharper negative effect on growth than previously thought. Since the global financial crisis, these so-called fiscal multipliers have been as much as three times larger than they were before 2009, the IMF research shows.

That means aggressive austerity measures may inflict deep economic wounds that make it harder for an economy to get out from under heavy debt burdens.

“It is sometimes better to have a bit more time,” IMF managing director Christine Lagarde said. “That is what we advocated for Portugal; this is what we advocated for Spain; and this is what we are advocating for Greece.”