International Monetary Fund Director Christine Lagarde today warned countries against implementing austerity in the face of weakening economies, saying, “it’s sometimes better to have a bit more time” to get budget deficits under control, if doing so will lead to stronger growth:
The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Ms Lagarde said that, given this reassessment of the impact of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets, should growth disappoint.
Economist Paul Krugman compiled this chart from the latest IMF World Economic Outlook data, which shows the European countries that have implemented the most austerity have seen their economies contract the most:
As Krugman wrote, “this indicates that the contractionary effects of fiscal consolidation are substantially bigger than policy makers were assuming.” Republicans, however, continue to insist that spending cuts and balancing the budget will lead the economy to turn around, when all evidence points to the contrary.