MercoPress. South Atlantic News Agency

IMF asks for “a bit more time” for Greece and Spain but Germany says it will affect confidence

Christine Lagarde: cutting too far, too fast would do more harm than good

The IMF on Thursday 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 told reporters. “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.”

But the IMF was less willing to be patient with Europe on following through with its efforts to seek a more cohesive fiscal and banking union. It said that process was critically incomplete, and blamed the plodding pace for contributing to economic uncertainty that was hurting global growth.

Emerging markets expressed frustration that the Euro zone troubles were spilling into their economies. The IMF still expects emerging markets to grow four times as fast as advanced economies, but it cut its forecast sharply for two of the biggest players, Brazil and India.

“Europe has to get its act together,” said Palaniappan Chidambaram, India's finance minister, speaking on behalf of the Group of 24 developing and emerging economies. ”What is happening in Europe is having an impact on developing countries”.