International Monetary Fund Chief Economist Olivier Blanchard defended findings that budget cuts caused a deeper-than-expected reduction in European growth, reflecting the fund’s milder fiscal policy prescription in recent months for countries such as Greece and Portugal.
The working paper published today by Blanchard and colleague Daniel Leigh followed a study included in the IMF’s World Economic Outlook in October, which they said “generated many comments, criticisms, and suggestions.” The paper finds that so-called fiscal multipliers, which gauge the impact of budget consolidation on growth, were “substantially higher” than anticipated by analysts during the debt crisis.
While the authors said their findings should not be seen as arguing for specific country policies, recent IMF advice in Europe suggests they have been influential. Greece and Portugal received more time to meet fiscal targets under international bailout packages and the fund says Latvia’s spending cuts have gone too far.
“The results do not imply that fiscal consolidation is undesirable,” Blanchard and Leigh wrote. “The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single country.”
The October report had been criticized by the European Central Bank and the European Commission, the other two members of the so-called troika of creditors in the euro region.
“The current debate appears to be too narrowly focused on the size of the short-term fiscal multiplier,” the ECB wrote in its December bulletin. “ Fiscal consolidation has a favorable impact on the path of the debt-to-GDP ratio, which, at present, is more important than ever to restore trust in fiscal sustainability in the euro area and beyond.”