New Paper Finds IMF Policies Are Increasing Risks to Economic Recovery in European, Other Countries

Center for Economic and Policy Research (CEPR)
Posted by

WASHINGTON – October 21 – A new paper from the Center for Economic and Policy Research examines whether policies prescribed by the International Monetary Fund (IMF) may pose a danger to economic growth and recovery in a number of countries, including Greece, Latvia, Spain, Portugal, Ireland, and Romania. The paper finds that the IMF has overestimated growth projections for various countries now pursuing fiscal tightening, austerity measures, and other pro-cyclical policies – often at the IMF’s urging – and that the Fund may continue to underestimate the downside risks to these countries’ economies. The lead author, CEPR economist Co-DirectorMark Weisbrot, debated these issues with the IMF during the Annual Meetings in Washington October 9.

“Despite the IMF’s concerns about the ‘fragility’ of the global economic recovery, the IMF continues to support pro-cyclical policies – that is, policies likely to make the downturns worse — in some countries, and fiscal consolidation in many others,” Weisbrot said. “The Fund should be supporting further fiscal stimulus, for example in the United States, where it is badly needed to boost a weak economic recovery and a slowing global economy.”

The paper notes that a number of the IMF’s pro-cyclical policies in 2008-2009 were part of agreements based on over -optimistic projections, and warns that it could be making similar mistakes in the current fragile economic recovery. In Greece, the IMF has downgraded its forecast for projected 2010 growth from negative 2 to negative 4 percent, in just the six months since April. The IMF now projects that Greece will not reach its 2008 level of GDP until 2015. Latvia’s economy is projected to decline another one percent for 2010, after suffering a world record decline of more than 25 percent in 2008-2009. Spain is also at risk of lapsing back into recession as a result of fiscal tightening.

“Considering its recent track record of over-estimating growth – not to mention missing the two largest asset bubbles in history altogether – it is important that the IMF err on the side of caution this time and avoid repeating the pro-cyclical policy mistakes of 2008-2009,” Weisbrot said. “Right now the side of caution is the side of fiscal stimulus – even if it involves central bank financing – since inflation is below target in the U.S., Eurozone, and Japan. The IMF should consider the best possible options for recovery, rather than opting for premature and risky fiscal consolidation.”

The Center for Economic and Policy Research (CEPR) was established in 1999 to promote democratic debate on the most important economic and social issues that affect people’s lives. In order for citizens to effectively exercise their voices in a democracy, they should be informed about the problems and choices that they face. CEPR is committed to presenting issues in an accurate and understandable manner, so that the public is better prepared to choose among the various policy options.

Share This Post