“There’s no alternative to reduce in the medium term too high sovereign debts, especially, and of course for… the eurozone as a whole,” Wolfgang Schäuble said in a debate with IMF Managing Director Christine Lagarde in Tokyo.
Lagarde on Thursday appeared to soften on the need for heavily-indebted countries to trim their fiscal cloth, when she said: “Instead of frontloading heavily it is sometimes better… to have a bit more time.”
She said the IMF was happy for debt-addled Greece to have another two years to get its fiscal house in order and bring budget deficits down to levels agreed with international creditors.
But in a debate on the sidelines of the International Monetary Fund’s annual meeting in Tokyo, which was briefly interrupted by an earthquake, Schäuble cautioned against any slippage.
“I think it’s even more important for sustainable growth that investors and consumers have some confidence,” he said.
“We have to stick to what we announced and we have to implement it step by step.”
Lagarde, who earlier in the day said “wartime levels” of debt were the “greatest roadblock” to future growth, said her position had not changed, insisting debt-reduction was vital, but that it was a matter of timing.
Consistently we’ve said the same thing: that adjustment… or fiscal consolidation… is necessary.
“But it’s a factor of pace. You know, at which pace does it happen?”
Lagarde said austerity could not be the only medicine for troubled economies, pointing to the human cost of cuts.
“If people stay away from the job market, they lose hope… which is why it’s critical that while maintaining those policies of fiscal consolidation where these are needed, there is also concern for growth, so that jobs can be created.”
Commentators have suggested that Lagarde is shifting the IMF’s stance on the need for austerity, at least partially, in response to the stumbling world economy.
The Fund’s latest forecast, released this week, said the global economy was on track to grow 3.3 percent in 2012, down from its July estimate of 3.5 percent.
The pace of growth next year would also be moderated, forecasters said, suggesting an expansion of 3.6 percent next year, also lower than a July estimate of 3.9 percent.
Jaco Kirkegaard, an economist at the Pesterson Institute in Washington said Lagarde’s emphasis on the need for a more nuanced approach to debt was not a sudden policy adjustment.
“I think it is part of the longer-term shift in the IMF’s position that has been under way for some time, which has seen the IMF move to a gradually more flexible stance on the need for austerity,” he said.
Jaco said the situation in Europe, where a number of large economies were engaging in belt-tightening, supported Lagarde’s emphasis on tailor-made policies.
“In Europe there is obviously the spillover effects, from when all your neighbours are doing austerity… it will affect you as well.
“As such, her remarks are part of a well-founded, empirically-based shift of the IMF views on the scale of austerity required in the current economic climate in the euro area.”