WASHINGTON/ZURICH — The International Monetary Fund (IMF) showed some new flexibility on Monday over how quickly it would press deeply indebted countries to bring their budgets under control if economic growth weakens. Its shift in tone could prove important for Athens where chances have jumped that a new Greek government would seek to renegotiate its 130-billion-euro (US$170-billion) bailout package with the IMF and the European Union, after Greek voters resoundingly rejected austerity measures in weekend elections. IMF Managing Director Christine Lagarde in a speech in Zurich said most advanced countries are proceeding with fiscal consolidation at a “prudent” pace of about 1 percent of GDP a year. But she said the IMF is aware that fiscal austerity holds back growth and the effects are worse in an economic downturn. Hence calibrating the cutbacks and achieving the right pace are essential, she said. “As next year looms on the horizon, countries need to keep a steady hand on the wheel. If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets,” she said.
“In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens,” Lagarde said. Lagarde has warned for months that countries need to choose the right balance between growth and austerity and that overly aggressive policies can backfire. But her latest remarks amounted to a call to Europe to loosen its adherence to strict budget deficit and debt targets for countries like Greece in a deep recession.