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Monday, Oct. 22, 2012

IMF changes austerity spots


Special to The Japan Times

HONG KONG — As I predicted, the Tokyo annual meetings of the International Monetary Fund and World Bank Group were almost a complete waste of time. Nevertheless, there were a few new interesting things to emerge.

From Japan's point of view, probably the most significant event was what didn't happen. China's top officials, the finance minister and the governor of the People's Bank, snubbed Japan by sending their deputies to the meetings. Ludicrously for adult officials aspiring to world financial leadership, they cited scheduling difficulties. But the real reason was that China wanted to punish Japan for its claims to the disputed Senkaku Islands.

In China's great political scheme, the minister and central bank governor are much less significant players than their counterparts in the United States, Germany or even Japan, and the decision not to attend would have been made at a much higher level. Nevertheless, the non-attendance of the two top finance officials was a calculated insult to Japan and also to the IMF and World Bank.

The unanswered question is whether their boycott was an adolescent sulk connected to the domestic uncertainty over the details of the political handover of power from Hu Jintao to Xi Jinping next month. Or was it evidence of a more calculated decision in Beijing to use its economic muscle in pursuit of political ends — in which case Japan and the rest of the world need to recalculate how to handle a more assertive Beijing.

It is hard for a leopard to change its spots. How much harder for the IMF, prime deviser of the ABC — austerity, budget cuts, conditionality, deficit reduction — regimen forcing indebted countries to swallow bitter economic medicine, to change its mind and suggest that sometimes it might be better to ease up and build up the strength of sickly countries than resort to blood-letting.

The IMF's almost Damascene conversion from severe austerity to a more balanced approach stressing the importance of growth in building up economic strength was the main talking points for the rest of the world at the IMF/World Bank meetings. Christine Lagarde, the managing director, was the public face of the IMF's new friendly attitude. She said that she was happy for Greece to be given two more years to meet its targets for deficit reduction.

Her attitude seemed to set her on a collision course with Germany, whose finance minister, Wolfgang Schaeuble, insisted that there was "no alternative" to making big cuts in budget deficits. Lagarde and Schaeuble spent the meetings pretending that they were reading from the same text, with the German minister saying that, "We are in complete agreement with the IMF, and especially with Ms. Lagarde, that in a mid-term view the reduction of too-high debt levels is completely unavoidable."

Lagarde also claimed that the dispute was more about perception than reality and that medium-term deficit reductions were essential, though they must be carefully "calibrated on a country-by-country basis. It cannot be one size fits all."

The formal communique of the IMF's main committee spelled out that, "Fiscal policy should be appropriately calibrated to be as growth-friendly as possible."

Reports from Brussels, however, suggest that Berlin has not bought the new deal. There, furious arguments are going on in a potentially dangerous game of brinkmanship over Greece. "A shouting match" and "an eyeball to eyeball contest to see who will blink first" are just two of the expressions used. The IMF wants Greece's official creditors to write off up to €30 billion and to extend the rescue plan by two years.

Germany and the European Central Bank are resisting fiercely any suggestion that official creditors, that is governments, should have to suffer losses. But the still ongoing review of Greece's progress by the IMF, European Central Bank and EU Commission is yielding the gloomy conclusion that there is no way that Athens can meet the target of getting its debts to 120 percent of gross domestic product by 2020. The estimates are that debts may be between 128 and 145 percent.

The issue is not just Greece, though that is the most immediate question that may finally precipitate the breakup or the beginning of the end of the euro and even the European Union. The Nobel committee in controversially awarding the EU the peace prize last week spoke correctly of the statesmanship that brought a continent from the disaster of war to reconciliation and democracy.

Why was the award made now rather than last year or five or 10 years ago? Was the Nobel committee warning today's nationalistic European politicians of the dangers of their selfishness? It is certainly annoying for the rest of the world to spend so much time listening to the petty squabbles of Europe. That resentment was also a strong undercurrent at the Tokyo IMF/World Bank meetings. But a breakup of the EU would have dangerous repercussions for the global economy.

Lagarde's plea for time for indebted countries had substantial backing from the IMF's own bureaucrats who discovered what commonsense might have told them — that piling austerity onto budget cuts could be dangerously self defeating, especially when the options of devaluing the currency or increasing exports are not available in a world that is growing more slowly.

IMF economists did six detailed case studies of countries that had heavy debt burdens of more than 100 percent of GDP over the past 80 years and the ways that they tried to tackle the debts. Their conclusions were: "Successful debt reduction requires fiscal consolidation and a policy mix that supports growth. Key elements of this policy mix are measures that address structural weaknesses in the economy and supportive monetary policy. Second, fiscal consolidation must emphasize persistent, structural reforms to public finance over temporary or short-lived fiscal measures. ... Third, reducing public debt takes time, especially in the context of a weak external environment."

The IMF's bottom line is that there are no quick fixes, and merely slashing deficits can be dangerously self-defeating. Its analysis was not merely a historical exercise. There are important lessons for today, especially when the global economy is weak. International Labor Organization Director General Guy Ryder pointed out that: "Global unemployment is still more than 30 million higher than before the financial crisis, and nearly 40 million more women and men have stopped looking for work." Particularly ominously, a third of the world's 200 million unemployed people are under 25 years of age.

Two economies today are at risk from the danger of debt spirals. One is Spain, where political pressures from the eurozone are creating the danger of a debt trap. The other instructive example is the United Kingdom, where the coalition government of David Cameron has pursued a policy of spending cuts and tax increases, putting its faith in austerity, which seems increasingly misplaced: it has seen the country suffer double-dip recession, miss its fiscal targets and see national debt grow from 46 percent of GDP to 84 percent since 2008.

Critics of Greece claim that it is a country where tax cheating, corruption and waste of public funds mean that it would be a waste to pour god new money after bad. On the other hand, with years of falling GDP and unemployment growing to 24 percent — and almost 50 percent among the young — cuts, more cuts, and still more cuts are not a remedy. There has to be growth to provide the room for economic maneuver.

But who is listening? The other sad lesson from the Tokyo IMF/World Bank meetings was that they came and went without any positive action. Lagarde called for bold and concerted action by world leaders to prevent the global economic crisis from getting worse. Was she crying in the wilderness, or just out of touch with the reality of modern selfish nationalistic politics?

Kevin Rafferty is editor in chief of Plainwords Media.


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