WASHINGTON/ZURICH (Reuters) - 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 year.
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 deep recession.
“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 soon.”
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,” Lagarde said.
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. ($1 = 0.7663 euros)
Reporting by Catherine Bosley, Doug Palmer and Stella Dawson; Editing by Michael Roddy