Christine Lagarde, head of the International Monetary Fund, says Greece should be given another two years to meet its fiscal targets, and is calling for more debt reduction before it chips in new money of its own.
We drew attention a few days back to the IMF’s new pragmatism. It used to stand for austerity first. Lately, it’s sounded more moderate than many of the governments it advises.
The IMF’s latest World Economic Outlook cautions Europe in general, not just Greece -- and the U.S. as well -- against tightening fiscal policy too much too soon. It worries about the vicious circle of slowing growth, worsening public finances and further budget stringency.
It’s a new line -- but mostly consistent, if you think about it, with what it used to say. As Keynes advised (or is said to have advised), when the facts change, sensible people change their minds. Too much fiscal stringency is far riskier today than in previous recessions because the slump is internationally synchronized and demand is suppressed almost everywhere.
Monetary stimulus is harder to do with interest rates close to zero. It is twice as hard in Europe’s case, where the worst-hit countries also suffer from an acute loss of competitiveness, which they can’t reverse with a currency devaluation. Usually, the contractionary effects of fiscal tightening can be partly offset with monetary accommodation and export demand. Today, not so much.
What’s especially vexing -- and I think Lagarde and the IMF are voicing this frustration -- is that Europe has an alternative. Collective action to reduce debt, strengthen banks, underwrite the finances of distressed governments and bolster confidence is perfectly feasible. Spain, Italy, Greece and the others have all made strenuous efforts to improve their public finances.
Sure, these need to be sustained, but not, as now, beyond the point where they become self-defeating. The euro area as a whole needs to meet these countries halfway, or the game will be up. It has the resources and the institutions, but it seems incapable of using them. Lagarde is right to be frustrated.
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