IMF’s Lagarde, Bucking Policy, Suggests Austerity Easing for Spain

(eToro Blog) The Spanish government is on the receiving end of some strong support from both the International Monetary Fund and the Organization for Economic Cooperation and Development. Yesterday, the IMF’s managing director Christine Lagarde seemed to have backpedaled on IMF policy and said that Spain should be permitted additional time to meet the budget deficit reduction targets so that the austerity measures imposed did not weaken growth prospects further. In her view, “automatic stabilizers” should be implemented if the economy deteriorated further which would allow for increased welfare spending and reduce some tax revenues.

For German Finance Minister Wolfgang Schäuble, that flies in the face of the IMF’s official stance which “time and again” called for indebted nations to reduce their high debt levels which threatened growth. Ms. Lagarde’s comments came in response to a recent study which found that the IMF and the European Commission had consistently underestimated the effect and impact that austerity measures would have on economic growth. Ms. Lagarde commented specifically that there is a concern that simultaneous budget cuts among the E.U. member states could intensify the impact of the austerity measures on the Eurozone’s collective economy.

While Schäuble may have disagreed with Lagarde’s comments on austerity, the German Chancellor Angela Merkel has indicated that she is considering a possible tax cut in order to stimulate demand and bolster Germany’s flagging economy.

The Secretary General of the OECD, Angel Gurria, said separately, that the Spanish government’s reluctance to request bailout assistance was justified. He believes that Spain is taking the proper steps to ensure that when and if they do officially request assistance that that request will be granted, and that if they were to ask for aid now that request could be denied with calls first for additional reforms. Gurria condemned the credit ratings agencies for not supporting the efforts of the Spanish government, saying that they are quick to punish underperforming countries but don’t support, help or protect those that are performing but are under market pressure.

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