Cracks at the top

Eurozone crisis live: Lagarde calls for growth amid austerity row

Christine Lagarde of the IMF warns that without growth, the future of the global economy is in jeopardy, as Germany's Wolfgang Schäuble hits back over austerity study

the Guardian,

12 October, 2012

A split appears to be opening up between the International Monetary Fund and eurozone leaders, following the IMF's admission this week that austerity is more damaging than it thought (see 8.20am).

Germany's finance minister, Wolfgang Schäuble, and EC commissioner Olli Rehn have both taken issue with Lagarde after she called for more caution on austerity.

The attacks came after the IMF published, and then endorsed, a survey that declared that world governments (and the Fund) have systematically underestimated the damage done to growth by austerity.

First came Schäuble, who argued that it made little sense to tackle high debt levels by deliberately making them higher.

The FT has the quotes:

When there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction

When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher.

Olli Rehn then weighed in a couple of hours later, telling CNN that Schäuble "had a point"

The EU cannot be making swift turns, rather it is a convoy and you have to carefully consider which policy turns are best.

But the implications of the IMF's study are clear (and vindication of Keynesian types who have railed against Europe's passion for imposing deep cuts on countries struggling with high debt levels)

FT Alphaville calls it a Game Changer moment.

Live coverage by the Guardian HERE

Lagarde vs. Rehn: Needed debate, or dangerous split?

Big divisions are appearing among the key players responsible for the eurozone's tough austerity program.

CNN,

12 October, 2012

The International Monetary Fund and the European Commission are at odds over which is the best way forward.

As millions of Europeans feel the biting impact of austerity measures, IMF boss Christine Lagarde says it's time to hit the brakes.

German Finance Minister Wolfgang Schäuble says changing directions now would lead to a critical loss of confidence in the whole plan.

And European Commission Vice President Olli Rehn says the IMF's findings "can be disputed."

It started on Monday when the IMF said that specific debt reduction targets, which underpin most of the austerity programs in place across recession-ravaged Europe, have a much deeper impact that expected.

New IMF research says that pruning a budget deficit by one percentage point could mean a cut in economic growth of between 0.9% and 1.7%. That is up to three times more severe than the current economic models suggest.

In other words, debt reduction is having a much more severe affect on growth than first thought.

It's led Lagarde to say that the austerity programs should not focus on specific targets and that countries should be given more time to cut their debt.

Schäuble shot back the next day. He told the Financial Times "when there is a certain medium-term goal it doesn't build confidence when one starts going in a different direction."

"When you want to climb a big mountain and you start climbing back down the mountain, then the mountain will get even higher," he said.

Next to weigh in was Olli Rehn. He told me today that he was not yet buying the IMF argument.

"The findings can be disputed and I am looking forward to extensive negotiations on this," he said.

"Even the IMF can be open to criticism -- it does not have the final word."

So, a needed debate or a dangerous split? Rehn, ever the diplomat, says he sees this as a sign of "healthy policy debate over the right course of action."

But he does support the German view. "He (Schäuble) has a point. The EU cannot be making swift turns, rather it is a convoy and you have to carefully consider which policy turns are best."

The EU will produce its own conclusions about the impact of austerity measures next month. Whether that brings us any closer to a consensus is hard to judge.

Remember the old joke about economists: if you laid all the economists in the world end-to-end you still wouldn't reach a conclusion.

But this is no joking matter. Millions of Europeans have fallen into poverty or at least economic hardship as a result of the current austerity programs.

Getting the right mix of policies to deal with the crisis not an option, it's an imperative.