The IMF called on nations with exorbitant levels of debt, such as Greece and Italy, to speed reforms aimed at making their economies more competitive and capable of stronger growth.
In general, the IMF wrote in a recently released review of the European economy, “the pursuit of nominal deficit targets should not come at the expense of risking a widespread contraction in economic activity.”
Some critics suggest the world economy is still suffering from IMF-inflicted wounds, saying the organization prematurely began an austerity push in the wake of the financial crisis. During the downturn that began four years ago, developed countries increased their borrowing by hundreds of billions of dollars to support their financial systems and stimulate their economies, pushing national debts to levels not seen since World War II. When economic growth returned last year, the IMF initially focused on how to begin bringing that debt down.
Even relatively healthy countries like Germany began to cut their budgets. At the Group of 20 summit in Toronto last year, the world’s largest economies pledged to reduce annual budget deficits by half — precisely the type of promise the IMF now warns against.
Research published by the IMF last fall emphasized the possible costs of such austerity. Fund officials warned of slowing growth and rising unemployment if countries jointly cut too deep and too fast, especially since there are few public policies currently available to offset the effect of government austerity.
Central banks, which have already reduced interest rates to extremely low levels, have little remaining ability to boost economic activity. Nor do countries in the euro zone have the ability to stimulate their economies by devaluing the currency to increase exports. These countries are wired into a currency union with their most important trading partners, eliminating exchange rates as a policy tool.
Michael Mussa, a senior fellow at the Peterson Institute for International Economics and a former chief economist at the IMF, said the agency has offered prescriptions based on its best understanding of economic developments.
“As we moved from recession to recovery and the recovery looked strong, the emphasis shifted. . . . Now that things look weaker, it is natural to look for ways to get more expansionary policy,” he said.
Ahead of the fund’s annual meetings, IMF forecasters lowered their outlook for the global economy. The disturbing prospect is that developed countries may never fully bounce back from the 2008 downturn and could continue to face higher unemployment. The IMF wrote recently that “growth prospects are likely to remain subdued” over the coming years.
“The combination of a recession and a banking crisis takes a long time to get resolved,” said Nathaniel Karp, chief U.S. economist for the Spanish bank BBVA.
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