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    Europe’s big division: growth vs. austerity

    IMF shifts focus, says extreme cuts hurt the economy

    IMF via Reuters
    “The world recovery, which was weak in the first place, is in danger of stalling,’’ said Olivier Blanchard, the IMF’s chief economist. “The epicenter of the danger is Europe.’’

    WASHINGTON - Global leaders are sharply at odds over how to rescue Europe from its escalating debt crisis: focus more urgently on economic growth, or on budget cuts? The disagreement pits one of the world’s most important lenders against Europe’s strongest economy.

    Yesterday, the International Monetary Fund said encouraging growth should be policy makers’ highest priority. It issued the warning on a day when the lending organization cut its estimates for global growth this year and predicted a recession in Europe.

    But Germany, the economic engine of Europe, is afraid it could get stuck paying much of the cost to bail out its weaker European neighbors. It is pushing instead for budget cuts, which the IMF says could weaken growth further and undermine market confidence.


    The IMF is already lending to the region’s bailout fund and has a lead role in monitoring the progress that nations such as Greece make in reducing their government deficits. Germany is also a large contributor to the bailout fund.

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    “There is a fundamental divergence in points of view,’’ said Eswar Prasad, a former IMF official and an economics professor at Cornell University. The IMF’s emphasis on growth is “a subtle but important shift.’’

    The IMF reduced its forecasts for global growth this year to 3.3 percent, below the 4 percent it projected in September. It’s also lower than the estimated 3.8 percent growth for 2011 and the 5.2 percent in 2010, the year after the US recession ended.

    The economies of the 17 nations that share the euro will shrink 0.5 percent this year. In September, the IMF predicted 1.1 percent growth. The IMF projects 1.8 percent growth for the year in the United States.

    If Europe does not take steps recommended by the IMF, such as reducing its emphasis on budget cuts, the 17 nations that share the euro could contract at a much faster pace, the fund said. That could possibly plunge the rest of the world into recession.


    “The world recovery, which was weak in the first place, is in danger of stalling,’’ said Olivier Blanchard, the fund’s chief economist. “The epicenter of the danger is Europe, but the rest of the world is increasingly affected.’’

    Governments should avoid extreme austerity measures - spending cuts and tax increases - in weaker economies, such as Italy and Spain, the IMF said. And healthier European countries whose governments are facing lower interest rates “should reconsider the pace’’ of their short-term budget cuts.

    The IMF’s managing director, Christine Lagarde, made a similar argument Monday in Berlin. The 187-member IMF conducts economic analysis and provides emergency lending to countries in financial distress.

    Germany is expected to grow this year, albeit slowly. It has had to foot a big chunk of the bailouts for Greece, Ireland, and Portugal.

    Chancellor Angela Merkel has pushed other countries to restructure their economies, as Germany itself did about 10 years ago. But her priority now is to get a broad agreement among European countries to limit their government deficits.


    German leaders fear that “if these countries don’t get their public finances in order . . . then Germany will end up footing the bill,’’ Prasad said. “That doesn’t play very well in Germany.’’