Published October 16, 2012
PARIS – The pace at which countries like Greece and Spain cut their deficits with austerity measures must depend on their economic conditions, International Monetary Fund Managing Director Christine Lagarde said Tuesday.
Lagarde said that while financially weak countries should hike tax hikes and cut spending to heal their public finances, the pace of those measures may have to be reconsidered in some cases because "conditions have changed" — notably the slowing global economy.
Deficit reduction must be "compatible with each country's circumstances," she told reporters in Paris on her way back from the IMF's annual meeting in Tokyo last week.
Many European governments, led by Germany, have for years insisted that countries with excessive public debts focus on debt reduction measures, even if that meant the economy was damaged.
But some economists argue that the pace of austerity measures in countries like Spain and Greece is now proving counterproductive by worsening their recessions, which deprive governments of valuable tax revenue needed to cut debt.
The issue has become a hot topic of debate in the European Union, whose 27 leaders will meet Thursday and Friday to address the financial crisis.
Faced with the evidence that deficit cuts are proving increasingly difficult in some countries, German Chancellor Angela Merkel appears to be softening her stance on austerity. She said last week that although Greece was missing its deficit reduction targets — which it had promised to meet in exchange for more bailout loans — it deserved another chance.
The International Monetary Fund is in favor of giving Greece two more years to meet the agreed targets.
Merkel, who visited Athens last week, has said that extending the timeframe for Greece's reforms can only be decided after a debt inspector's report, expected within weeks.
In Spain's case, the government has been imposing new austerity measures that analysts say would pre-qualify it for eurozone aid — should it want or need to request it.
Other countries that are pushing through tough budget cuts include Italy, Portugal, Ireland and even larger, traditionally more stable economies like France and Britain.