The International Monetary Fund and the EBRD presented a united front on the need for austerity to tackle the debt crisis yesterday even as hostility to further cuts in spending and tax hikes was spread across large swathes of Europe.
With signs that the appetite for austerity is waning, the IMF provided a reminder that stimulus alone was not enough to tackle the continent’s deep-seated economic problems.
David Lipton, the fund’s first deputy managing director, told Emerging Markets that there was “no getting around” the need to reduce debt levels.
“High debt leaves countries exposed to interest rate shocks, limits their capacity to respond to future shocks, and reduces long-term growth potential,” he said.
“At the same time, we all know that fiscal consolidation―reducing deficits by cutting spending or raising revenues―can and usually does stifle growth.” He said the critical challenge for policymakers in the Europe was to devise a strategy that was “good for stability and good for growth”, adding: “This is possible.
“But there is no denying that, in the short term, consolidation involves real costs and requires tough choices, the more so given that growth is already below potential and there is little scope for additional lift from monetary policy or external demand.”
In an interview with Emerging Markets, EBRD president Thomas Mirow said austerity measures were “necessary” but acknowledged that engaging in structural reforms in a very short period of time made things even more difficult.
“The worsening situation in the eurozone comes from a rising awareness that austerity, as necessary as it is, comes at a cost,” he said.
“In a number of countries the hardship people must bear is quite severe. But my sense is that in most countries of central and eastern Europe, there is a willingness to go through austerity and less anxiety about the downsides of such a policy.”
There has been a marked shift among politicians in the eurozone away from austerity and towards a focus on policies to stimulate growth in the wake of elections that saw pro-austerity political parties in France and Germany thrown out of power.
This week official figures showed that without strong growth in Germany the eurozone would have fallen back into recession in the first quarter of the year following a contraction in the final three months of 2011.
Michael Ganske, head of emerging markets research at Commerzbank, the challenge that the authorities faced in the CEE region was not that different from that in the eurozone – whether to worry about weak growth or the threat of inflation.
“All the discussion is about ‘is the German way right, that it is all about austerity, or is it more or a French or Mediterranean way’. You need to stimulate economic growth and can’t just look at short-term debt dynamics,” he said.
“Personally I think it is too short-sighted to look just at one year’s deficit because clearly debt sustainability is determined by growth dynamics and you implement austerity in a way that is killing the economy.”
“All the discussion is about is the German way right, that it is all about austerity, or is it more or a French or Mediterranean way and say you that is the short term you need to stimulate economic growth can’t just look at the short-term debt dynamics.”