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11 October 2012

FT: Schäuble and Lagarde clash over austerity


High-level splits over the handling of the eurozone crisis burst into the open when Germany's finance minister rebuked the head of the International Monetary Fund after she warned that EU leaders should ease demands for tighter austerity in peripheral economies.

Wolfgang Schäuble said Christine Lagarde had appeared to contradict the IMF’s own stance in advocating an easing of austerity, noting that the fund had “time and again” warned that high debt levels threatened economic growth. “When there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction”, Mr Schäuble said. “When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher.”

Ms Lagarde said eurozone countries should not blindly stick to tough budget deficit targets if growth weakens more than expected. She argued that they should allow “automatic stabilisers” – higher welfare spending and lower tax revenues – to kick in if the economy deteriorated. “It is sometimes better to have more time”, Ms Lagarde said, noting that if countries tried to cut their budgets simultaneously it could multiply austerity’s impact on the economy.

José Viñals, head of the IMF’s monetary and capital markets department, appeared to warn Berlin against blocking any Spanish request for assistance. Mr Schäuble has insisted that Madrid does not need additional financing aid even as Brussels has been pushing it to ask for assistance.

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© Financial Times


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