IMF insists on austerity despite economic damage
(MoneyWatch) The International Monetary Fund continues to insist governments implement budget cuts despite evidence austerity measures hurt struggling economies. The agency's actions also contradict statements made by Managing Director Christine Lagarde.
Earlier this week the Greek Parliament approved a plan to cut 15,000 civil service jobs, one of the requirements it had to meet in order to get a $3.6 billion bailout payment from the IMF and other lenders. Since the beginning of the financial crisis, the IMF has required all governments severely cut spending in order to receive funds.
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This policy has had a devastating impact across Europe and especially on the economies of Greece, Spain, Portugal and Ireland, which have all had to borrow emergency funds from the IMF.
The overall eurozone jobless rate was a record 12.1 percent in March, according to a report today from Eurostat, up more than a full percentage point from a year ago. Spain, whose economy has been contracting for nearly two years, had an unemployment rate of 26.7 percent in March; Portugal's was 17.5 percent and Ireland's was 14.1 percent. Greek economic figures are two months behind those of the rest of EU because of cuts in government spending. In January Greece's unemployment rate was 27.2 percent and is now estimated to exceed 30 percent.
On Monday the IMF issued a report calling for the economically healthy nations of Asia to pre-emptively initiate austerity measures in order to prepare for a downturn.
In contrast with what has happened in Europe, Japan is seeing signs of economic growth following its decision to reject austerity measures. In an effort to reverse two decades of economic stagnation, Prime Minister Shinzo Abe has increased government spending and monetary stimulus. A report out Tuesday showed the nation's unemployment rate is now at a four-year low, while consumer spending in March was up 5.2 percent from a year earlier.
The experience of Europe and Japan has yet to change the IMF's behavior but it may be having an influence on its public statements. Two weeks ago the IMF's Lagarde warned the U.K. it was cutting spending too much.
"We have said that should growth abate, should growth be particularly low, then there should be consideration to adjusting by way of slowing the pace. This is nothing new. And this is still the position and one that has been very clearly articulated within the various departments. ... So we very much stand by that. Consideration should be given if growth weakens, and looking at the numbers, without having dwelled and looked under the skin of the British economy, as we will do in a few weeks' time under the article IV, the growth numbers are certainly not particularly good."
This is not a recent change in direction by Lagarde. A year ago she said that while "some countries under pressure have no choice but to cut deficits today. ... [A] global undifferentiated rush to austerity will prove self-defeating." In the same speech she praised the U.S. and EU central banks for continuing to inject money into their economies and hoped other nations would follow suit to keep global economic growth "strong and steady."
Other key political figures in Europe have spoken out against austerity and advocated stimulus measures. Only hours after winning the Italian Senate's final approval, the nation's new prime minister, Enrico Letta, weighed in against the prevailing policy of draconian budget cuts. Speaking at a joint press conference with German Chancellor Angela Merkel on his first trip abroad, he said, "We want a Europe that uses the determination with which it has built the rules to avoid [overly high] deficits to implement policies fostering growth.''
