IMF’s race-to-the-bottom proposals for Europe


In a closed event held at the Brookings Institution in Washington on Tuesday, IMF managing director Christine Lagarde stated that the Fund currently saw "more somber trends" since issuing its lowered global economic growth forecast at the IFI spring meeting meetings in April.

She also said, according to the posted text of her speech: "At the same time, the downside risks to growth remain as prominent as ever."

Lagarde specifically identified new signs of weaker growth in China and other BRICS countries, "self-inflicted fiscal wounds" in the US, and a euro-area economy which is "still stuck in low gear" (she should have said "reverse gear"; she confirmed the IMF’s prediction for euro-zone GDP to fall by 0.3 per cent in 2013).

Unfortunately Lagarde did not mention that the IMF’s endorsement of fiscal consolidation in G20 and other economies starting in 2010 has contributed to the current slowing of world growth.

The title of her speech was "Policy Steps Toward a Full-Speed Global Economy" but some of the specific measures she put forward may actually have the opposite effect.

These include her insistence that Japan must double its consumption tax; that European countries "under market pressure" must maintain the pace of deficit reduction; and that euro-area countries need to push forward on labour market and other structural reforms "to unleash competitiveness".

Simultaneously with Lagarde’s Brookings speech, on Tuesday the IMF released the concluding statement of its annual "Article IV" mission to France, which provided examples of the approach it is taking in euro-zone countries, whether borrowing or non-borrowing. France is among the latter (the document is available also in French).

Although it agrees with last week’s decision of the European Commission to grant France and some other member states a waiver on the annual 3 per cent of GDP deficit limit, the IMF statement insists that further deficit reduction must be "achieved by acting solely on [the] policy lever" of expenditure containment, even though the IMF’s own research shows that the multiplier effect of spending cuts is greater than tax increases.

Noting that "euro area periphery countries [are] registering large competitiveness gains", the IMF is now pushing France to adopt similar internal-devaluation-style polices, which are largely focused on reducing labour costs.

The mission report includes specific recommendations but the Fund’s mission chief appears to have expounded in more detail on labour issues during a press briefing on Tuesday, where he is cited by Reuters as suggesting a "a lower minimum wage" and "more [collective] negotiations at enterprise level" rather than at the sector level.

Similar measures have been aggressively pushed by the IMF and its troika partners in Greece, Portugal, Spain and other euro countries.

Under the guise of assisting each country to become more competitive than its neighbour, it appears that the Fund is doing what it can to unleash a race to the bottom within the euro area.