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IMF takes a new view on austerity Add to ...

So much for austerity. The International Monetary Fund, which has been a key proponent of cutbacks when it comes to government spending and big deficits, appears to have made a switcheroo this week. IMF managing director Christine Lagarde advised Europe on Thursday to cut Greece and Spain some slack in their attempts to trim their deficits.

As Izabella Kaminska at FT Alphaville pointed out, the move marks a striking departure for the IMF, which in the past has taken a hard line on countries to get their finances in line – particularly in the case of emerging economies.

The move also follows a downgrade earlier in the week to the IMF’s projections for economic growth in 2013. Those projections included a re-evaluation of what government cutbacks do to economic growth. Originally, the assumptions had been that cutbacks have relatively little impact on growth, but the IMF now believes that under current circumstances in Europe, the impact is much greater.

According to the Financial Times, Ms. Lagarde is now saying that Greece should be granted two more years to get its spending in line.

“It’s sometimes better to have a bit more time,” she said from Tokyo.

The idea that austerity measures might not be the solution to the European debt crisis – or even the problems afflicting the U.S. economy – comes at an interesting time for the global economy and the stock market.

Major indexes have been moving with developments out of Europe throughout most of the past two years. Rioting against government cutbacks and attempts to make cutbacks to receive financial assistance – we’re talking primarily about Greece here – have dominated investors’ attention, even overshadowing earnings news and U.S. economic developments.

Now, the IMF is suggesting that things should change. And while the IMF represents just one view, it is an influential one and it could mean big changes in the way in which governments address their financial shortfalls.

It is certainly going to trigger a reaction from observers. Already, Paul Krugman of The New York Times has weighed in with the view that it could have an impact on the U.S. presidential election: “The reality is that everything that has happened economically since the turn away from stimulus to austerity, from interest rates to inflation to output, has refuted the doctrine the GOP is pushing. Since there has of course been no concession of error, this does not bode well for the U.S. economy if Romney wins.”

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