Lagarde Urges Gradual Deficit Cut as Austerity Rejected

Lagarde Urges ‘Gradual’ Deficit Cut as Voters Reject Austerity
Christine Lagarde, managing director of the International Monetary Fund (IMF), in Washington. Photographer: Andrew Harrer/Bloomberg

International Monetary Fund Managing Director Christine Lagarde called on developed nations to push through “gradual” fiscal cuts as voters in France and Greece rejected austerity as the sole fix to Europe’s debt crisis.

“Austerity versus growth is very much the debate of the hour,” Lagarde said today in a speech at the University of Zurich, Switzerland. “I would argue it is not ‘either/or.’ We can design a strategy that is good for today and good for tomorrow.”

With unemployment in the euro region at the highest in almost 15 years and an economy the IMF predicts will shrink this year, some members of the 17-nation group are challenging austerity plans advocated by Germany.

French socialist Francois Hollande defeated President Nicolas Sarkozy yesterday and pledged to push for less austerity and more growth in Europe. A recession in Spain threatens to derail the government’s deficit reduction plans and the government of the AAA-rated Netherlands fell last month amid the effort to deepen deficit cuts and meet European targets.

Lagarde, a former finance minister under Sarkozy, said in response to an audience question that she hopes Hollande and his colleagues in the French government and the region pursue a policy that “will be a very strong anchoring into Europe and into the euro zone.”

‘Imperative of Growth’

“It’s clear that partners of the euro zone have in mind and have had in mind the imperative of growth,” she said. “Growth and stability are inter-cyclically linked to one another.

The euro weakened for a sixth day, its longest series of declines since September, dropping as much as 1 percent before paring losses. The currency declined to $1.2955, the weakest since Jan. 25, before trading at $1.3056 at 3:58 p.m. New York time.

While fiscal adjustment “is essential” and requires governments to lay out a plan for reducing debt in the medium run, “we know that fiscal austerity holds back growth, and the effects are worse in downturns,” Lagarde said.

As a result, “the right pace is essential” and will depend on countries’ specific situations as some face rising borrowing costs, leaving them little choice but to move faster, she said.

The debate on the policies to pursue has split policy makers, investors and academics as Europe pursued a cocktail of tax increases and spending cuts to beat a sovereign debt crisis that raged from Greece through Ireland and Portugal to the heart of the single currency bloc.

Joint Loan

In Greece, the first country in the euro region to get a joint loan by the European Union and the IMF, elections left the two biggest parties short of the clear majority to keep bailout efforts there on track.

“If you look at the polls and the surveys, there is clearly in the Greek population a determination to stay within the euro because it does bring a significant amount of benefits as opposed to the risks that will arise from the exit,” Lagarde said when asked whether Greece should exit the currency zone.

In many countries, fiscal adjustment, weak banks and troubled housing markets are holding back growth, Lagarde said.

While there may be scope by some central banks for faster action, monetary policy in developed economies is close to “full speed” and “cannot do the job alone,” she said.

“Countries need to keep a steady hand on the wheel,” Lagarde said. “If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets.”

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