Is the IMF going soft on austerity?

Christine Lagarde (L), the Managing Director of the International Monetary Fund, addresses a press conference May 22, 2012 in London, England.

Remember the IMF of old -- that  flinty and hard-hearted guardian of fiscal rectitude? Could the Fund now be turning into something warm and cuddly?

The old image was forged in the Latin American debt crisis of the 1970’s and 1980’s; the Fund became synonomous with austerity. As the lender of last resort, the IMF insisted on deep budget cuts and big tax hikes in the countries that it helped: Argentina, Brazil, Peru, among others. The hard line policies brought short term misery to millions of people and unpopularity for the Fund, and IMF  officials were burned in effigy.  

Today, however, the Fund appears to be changing its tune, and softening its austere approach. In the teeth of the euro zone debt crisis, Fund officials are beginning to question the benefit of  harsh fiscal remedies. Speaking at the annual joint IMF/World Bank meeting in Tokyo, officials now say deficit reduction is doing more damage to the European economy than they thought. The resulting downturn in the euro zone is hitting global growth, “The IMF has had a change of view," says Andrew Hilton of the CSFI think tank, “the Fund has decided that if Europe can do this much damage to the global economy then maybe the Europeans ought to think about a change of policy.”

The IMF does not call for the easing of austerity in specific countries. It merely suggests that the most troubled economies might  be given more time to reduce their deficits. This change of tone could make a difference. After all, the IMF has pledged $103 billion to Greece, Ireland and Portugal. IMF officials are part of the so-called "troika" of creditors along with offficials from the European Commission and the European Central Bank. These are the so-called “Men in Black”. They go into the euro zone countries that have asked for help and tell them what they have to do to deserve a bailout. 

Since one of these creditors seems to be turning a lighter shade of black, that could herald a softer, gentler approach. 

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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