The World Economic Outlook press conference in Tokyo featured a very good question on austerity and was answered by chief economist Olivier Blanchard (my highlighting):
QUESTION: Given what you now know about fiscal multipliers and the effects on growth as you outline in the WEO, has the IMF’s advice on fiscal consolidation added to the problems we have seen in the world economy over the last couple of years? What lessons should advanced economies take from your findings in this report? For Greece and Spain in particular, doesn’t this mean those two countries should move slower on austerity measures given the effect on growth?
Mr. Blanchard – Let me answer this important question.
First, the advice of the IMF has always been that we have used this expression: This is a marathon, not a sprint. This is going to take many years. Steady and slow wins the race. It is still very important to have credible, medium-term plans because then you can go more slowly at the beginning than otherwise. Second, we have been more specific in the recent past, partly in the light of what you just said, which is that we have said that countries should focus in general on structural targets rather than nominal targets; put another way we have said let the automatic stabilizers work, and we have been successful in a number of cases to shift to such targets. This has the implication that if growth turns out to be worse than expected, then the country does not have to take additional fiscal measures, which could make things worse.
And third, as time goes, and we see, indeed, a weaker recovery in many countries, in some case, we have said that the targets themselves had to be adjusted. As you saw, the Portugal program just readjusted the targets, moving from 3 percent next year to 4.5 percent, and I think that when the case is there, we have to be ready to readjust the targets.
This provides some hope for countries like Spain and Greece. Together with the IMF’s Managing Director Christine Lagarde’s comments on another debt restructuring for Greece it looks like finally some things begin to move into the right direction. What is needed in Greece, Spain and also Ireland is debt restructuring. These countries have sectors – public or private or both – which cannot possibly repay their debt at interest rates set by the markets.
To resume growth, some of that debt must be restructured so that afterwards the repayment of debt is absolutely possible. Only then will confidence return, if you want to hear that phrase. It is sad that the IMF and other organizations have needed so many years to understand that the confidence fairy cannot be summoned by austerity, or to put it in plain English, that cutting government spending in times of weak demand increases economic growth. It is not that there have been no precedents.
However, the IMF is just one third of the troika. Two more to go.