FEARS about the rapidly deteriorating health of the global economy have brought the debate between austerity and growth policies to the fore, with International Monetary Fund (IMF) head Christine Lagarde on Thursday calling on European nations to ease up on spending cuts.
Pushed by rising debt levels, European Union (EU) nations have had to follow a course of severe austerity measures over the past few years to ease borrowing costs and regain market confidence. This has led to stagnant growth in the region, which has in turn caused an economic slowdown in emerging markets, including South Africa.
Exports had been falling "significantly" because of Europe’s austerity measures, Stanlib emerging markets economist Xhanti Payi said on Thursday. "If they start easing, it may help increase demand, which will be good for us ."
But Mr Payi cautioned that any increase in spending would be a short-term measure as there was no escaping the need for European fiscal consolidation.
London-based Capital Economics said in a note this week that exports from emerging markets dropped 4.1% year on year in August, while imports fell at about the same rate. "The continuing crisis in the eurozone, sluggish US growth and a slowdown in China have all taken their toll."
The IMF warned earlier this week that governments around the world had systematically underestimated the damage austerity measures had done to growth.
Ms Lagarde said given this reassessment of the effects of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets, should growth disappoint. "It’s much more appropriate to apply the measures and let the (automatic) stabilisers operate ."
Ms Lagarde was speaking at the annual meetings in Japan of the IMF and the World Bank.
Automatic stabilisers allow for the lower tax revenues and higher benefit payouts associated with a weak economy. "That applies to pretty much all the countries, particularly in the eurozone, that are applying that policy mix," Ms Lagarde said.
As tensions over Europe’s sovereign debt crisis heightened about two years ago, the IMF — along with the EU and the European Central Bank — was at the centre of calls for spending cuts. Peripheral governments in the common monetary union such as Greece, Portugal, Italy and Spain were urged to slash government spending to regain market confidence.
Germany, which is Europe’s biggest economy and the world’s fourth largest, has also been behind the push.
Since taking up her tenure, Ms Lagarde has had a "softer" stance than Germany, Mr Payi said. She was appointed to her post last June after her tenure as French finance minister.
The IMF appears to be becoming increasingly concerned about the effect of government cutbacks on growth.
Ms Lagarde cautioned against countries front-loading spending cuts and tax increases. "It’s sometimes better to have a bit more time," she said.
Ms Lagarde further said struggling European countries including Greece and Spain should be given more time to reduce their budget gaps.
"That is what I have advocated for Portugal, this is what I have advocated for Spain and this is what we are advocating for Greece, where I said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation programme that is considered," she said.
Brussels has granted Spain an extra year to reduce its public deficit to 3% of gross domestic product (GDP).
Spain’s economy is expected to contract 1.5% this year.
But it is still aiming to cut its deficit to 4.6% of GDP next year from about 9% last year and has announced five packages of spending cuts and tax rises in nine months.
In its World Economic Outlook, the IMF said that evidence from 28 countries showed that fiscal multipliers, which governments use to estimate the effect of cutbacks on growth, had been too favourable.
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