* IMF aware austerity holds back growth - Lagarde
* Stick to fiscal measures, not targets, Lagarde says
* Comments come after French, Greek elections
By Doug Palmer and Catherine Bosley
WASHINGTON/ZURICH, May 7 The International
Monetary Fund showed some new flexibility on Monday over how
quickly it would press deeply indebted countries to bring their
budgets under control if economic growth weakens.
Its shift in tone could prove important for Athens where
chances have jumped that a new Greek government would seek to
renegotiate its 130-billion-euro ($170-billion) bailout package
with the IMF and the European Union, after Greek voters
resoundingly rejected austerity measures in weekend elections.
IMF Managing Director Christine Lagarde in a speech in
Zurich said most advanced countries are proceeding with fiscal
consolidation at a "prudent" pace of about 1 percent of GDP a
But she said the IMF is aware that fiscal austerity holds
back growth and the effects are worse in an economic downturn.
Hence calibrating the cutbacks and achieving the right pace are
essential, she said.
"As next year looms on the horizon, countries need to keep a
steady hand on the wheel. If growth is worse than expected, they
should stick to announced fiscal measures, rather than announced
fiscal targets," she said.
"In other words, they should not fight any fall in tax
revenues or rise in spending caused solely because the economy
weakens," Lagarde said.
Lagarde has warned for months that countries need to choose
the right balance between growth and austerity and that overly
aggressive policies can backfire. But her latest remarks
amounted to a call to Europe to loosen its adherence to strict
budget deficit and debt targets for countries like Greece in a
"This brings to bear with greater clarity that it is
counterproductive to chase fiscal targets when economic
conditions do not allow a country the room to make the cuts,"
said Domenici Lombardi, a former IMF official who is now a
senior fellow at the Brookings Institution in Washington.
Germany in contrast has insisted that countries stick to
fiscal targets, set as a condition for receiving bailout money,
as the route to restoring prosperity, a message that an EU
spokesman repeated after the Greek and French elections.
Lagarde spoke one day after Francois Hollande, a Socialist
running on an anti-austerity message, defeated center-right
incumbent Nicolas Sarkozy in the French presidential election.
The vote, combined with Greek voters' rejection of parties
that slashed budgets to get a European Union/IMF bailout,
undermined investor confidence in the euro zone's ability to
tackle its debt crisis.
"The most important element is to lay out a credible
medium-term plan to lower debt," Lagarde said. "Without such a
plan, countries will be forced to make an even bigger adjustment
In response to a question about how she envisioned the euro
zone's future, Lagarde said: "There will be bumps on the road.
But it will be there and it will be solid."
Her speech in Zurich met with loud protests by left-wing
student groups and an unusually large number of security guards
patrolled the hallways.
"It can't be that someone, whose policies lead to death and
poverty and drive people to suicide, as is happening now in
Greece or Italy, is given a further platform at the university,"
student group Uni von unten said in a statement
Lagarde acknowledged "austerity versus growth is very much
the debate of the hour".
But she termed it a "false debate", saying it was possible
for countries to design strategies that are both good for
stability and growth.
"We know that fiscal austerity holds back growth and the
effects are worse in downturns. So the right pace is essential -
and the right pace will be country specific. The right mix
between cutting spending and raising revenue is also critical,"
Meanwhile, White House spokesman Jay Carney said that
President Barack Obama views a balanced approach between fiscal
consolidation and boosting growth as the best solution to the
European debt crisis, which continues to be a headwind facing
the U.S. economy.
Obama will host France at a G8 meeting in Camp David,
Maryland, on May 18 and 19 where he is expected to press
European leaders to promote growth where possible to prevent the
euro zone crisis from destabilizing a fragile global recovery.