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20th Aug 2022

Rehn rebuffs IMF criticism of austerity measures

  • Lagarde and Rehn - the IMF and the EU do not see eye to eye on austerity any more (Photo: consilium.europa.eu)

Blanket criticism of austerity policy misses the positive effect it has on market confidence, EU economic affairs commissioner has said in the face of negative statements by the International Monetary Fund (IMF).

Referring to a report out last week in which IMF economists said the growth-dampening effects of spending cuts had been underestimated, Olli Rehn at a think-tank event in Brussels on Friday (11 January) said "one cannot draw, on the basis of this study, strong policy conclusions."

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"In the political debate, what has often been forgotten is that we have not only the quantifiable effect - which is something that the economist like to emphasize - we also have the confidence effect," he added.

Taking Italy as an example, he asked "what would have happened" if Rome had decided to loosen fiscal policy in November 2011, when technocrat Prime Minister Mario Monti took the reins and started introduced spending cuts?

"From November onwards, we have seen more consistent and prudent fiscal consolidation by Italy and we are seeing much lower bond yield for Italy, which brings savings to Italian tax papyers and facilitates return to economic recovery," Rehn said.

He noted that the European Commission, the IMF and European Central Bank - the so-called troika, which ovesees bailout programmes in Greece, Ireland and Portugal - are in the middle of an "ongoing trialogue" to find "common ground" on the effects of spending cuts on growth.

Rehn's spoke out amid increasing IMF disagreement on EU-imposed austerity on crisis-hit member states - a policy which puts heavy emphasis on slashing spending and increasing privatisation.

An IMF official last spring criticised the pace and depth of the budget cuts demanded from Greece, while Christine Lagarde, who heads the Washington-based institution, late last year said Athens needs more time to get its house in order.

Rehn refused to accept the criticism on austerity, but he acknowledged that "the coming months will see tough times and social tensions," because EU citizens will see improvements in their day-to-day lives "only with some delay."

He urged EU countries not to "lapse into complacency."

He also highlighted his native Finland and France as registering "worrying losses" in their shares in global markets.

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