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Europe austerity strategy is hurting growth, IMF says

IMF officials and outside experts said it was clear that government belt-tightening was taking a toll on growth, especially in struggling Eurozone economies.

April 19, 2013|By Don Lee, Los Angeles Times
  • IMF Managing Director Christine Lagarde called for countries to reassess budget cuts that are too aggressive, but she also spoke about the need for balanced budgets, structural reforms and debt reduction.
IMF Managing Director Christine Lagarde called for countries to reassess… (Stephen Jaffe, IMF via Getty…)

WASHINGTON — Britain and the Eurozone are steadfastly sticking to austerity measures despite increasing evidence that such action alone isn't working to revive their economies and is dragging down global growth.

Such persistence, analysts said, could further endanger a U.S. economy that is facing another spring slowdown.

European leaders have come under renewed pressure this week from the International Monetary Fund and other parties as the IMF and the World Bank hold their spring meetings in Washington.

In papers and at forums, fund officials and outside experts said it was clear that government belt-tightening was taking a deeper toll on growth, especially in struggling Eurozone economies, than many of them previously thought.

Moreover, academic economists offered new evidence that cast doubt on a pro-austerity view that countries crossing certain debt-burden thresholds would see negative economic output.

These reports and statements were accompanied by an updated IMF forecast that downgraded the growth outlook for Britain and the United States and projected another year of recession for the 17-nation single-currency union.

In media interviews, some of the toughest criticisms were directed at Britain, which has not budged on its austerity drive. It's "playing with fire," said the IMF's chief economist, Olivier Blanchard.

IMF Managing Director Christine Lagarde has taken more of a middle ground: She called for countries to reassess budget cuts that are too deep and too rapidly undertaken, but she also spoke about the continued need for balanced budgets, structural reforms and the importance of reducing debt.

"We need growth, first and foremost," Lagarde said Thursday. "Should growth abate … there should be consideration for adjusting the pace" of fiscal consolidation.

But British and other officials of Northern European nations, which have outperformed their southern counterparts and are pushing the austerity strategy, show little indication of changing direction.

Anders Borg, Sweden's finance minister, insisted that austerity went hand in hand with necessary economic structural reforms. He acknowledged during a forum Wednesday that "fiscal consolidation is extremely painful," but said that is the very reason "why we should be cautious about [high] debts and deficits."

Peter Westmacott, British ambassador to the United States, was more blunt Thursday: "We simply don't believe we have any other alternative.... We're going to stay the course."

Some analysts said the renewed pressure by international organizations, along with a political backlash to austerity in countries such as Italy, could help move Eurozone leaders to relax the austerity requirements on member nations.

They noted that some debt-ratio deadlines and targets already have been extended to some countries. And France, the second largest Eurozone economy after Germany, has indicated that it wants to slow its deficit-reduction plan to avert a recession.

Even so, Europe experts see few signs that Eurozone leaders are prepared to make a fundamental shift in approach any time soon.

German Chancellor Angela Merkel faces an election this fall and, at least until then, is unlikely to waver in her long-held position of demanding fiscal discipline.

As for the IMF, Nicolas Veron, a senior fellow at the Brussels think tank Bruegel, said it wasn't clear just how much influence the fund would have.

Veron said it wouldn't help that the IMF lost credibility for endorsing a misguided initial plan to force small bank depositors in Cyprus to help in a bailout last month.

Domenico Lombardi, a senior fellow at the Brookings Institution, put it this way: "The IMF has made a call against austerity with no success."

For the U.S., the prospect of a prolonged slump in the Eurozone comes at a difficult time.

Obama administration officials have repeatedly urged their European counterparts to ease up on austerity and focus more on growth, but the U.S. is struggling with its own fallout from a series of fiscal policy changes, most recently spending cuts under the so-called sequester.

The budget cuts and higher taxes recently implemented are expected to slice U.S. economic output by about 1.5 percentage points this year, leaving growth for the year at a sluggish 2% rate.

Mark Zandi, chief economist at Moody's Analytics, said the fiscal drag to U.S. growth would be the biggest in 60 years and would make the American economy highly vulnerable.

"They're significant head winds and will be blowing hardest this summer," he said.

The IMF's new projection has Japan, the world's third largest economy, showing faster growth this year, thanks to expansionary monetary and fiscal policies. But that won't offset a contraction in the Eurozone, which buys about a quarter of America's exports and is a principal source of investments and profits for U.S. corporations.

don.lee@latimes.com

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