Austerity may not be the solution to Europe's problems after all.
IMF Managing Director Christine Lagarde said the harsh austerity measures European officials are pushing could produce the opposite effect on struggling eurozone nations like Greece and Spain. Speaking in Tokyo at the annual meeting of the IMF and World Bank, Lagarde indicated that she had become concerned that government cutbacks were limiting growth and inadvertently exacerbating the region's debt crisis. The IMF warned that European governments had misjudged the severity of budget cuts and tax increases on their economies and that more austerity could lead to a deeper financial troubles.
"Risks for a serious global slowdown are alarmingly high," said the IMF's World Economic Outlook report.
The IMF expects the global economy to expand 3.3% this year and 3.6% in 2013, the slowest rate of growth since the 2009 recession.
Greece and Spain, the hardest hit nations in the eurozone, have committed to deep budget cuts in return for badly needed loans from the European Central Bank. Strikes and protests have become a common occurrence in these nations as citizens directly challenge the harsh economic measures. Greece's unemployment rate hit 24.4% in August and Spain's was 25.1% -- the highest in the 17-member eurozone region. The eurozone's jobless rate touched a record high of 11.4% in August, according to Eurostat.
Spanish Prime Minister Mariano Rajoy recently disclosed new cost-cutting measures that would reduce Spain's budget deficit by $84 billion in less than three years — the country's fifth austerity package in 11 months. In June Rajoy asked for $129 billion in aid in addition to the $266 billion the country will receive next year.
Global markets are widely anticipating a request by Spanish leaders for an official bailout, but for now, Spain continues to "stubbornly" resist one, says The Daily Ticker's Aaron Task in the attached video. Rajoy has told EU finance ministers that he needs more information about the possible restrictions placed on Spain before making a decision.
This week's move by Spain to slash its debt obligations did little to boost investor confidence in Spain's ability to become solvent. Ratings agency Standard & Poor's downgraded Spain's debt rating on Tuesday from BBB+ to BBB- , one level above junk-bond status. According to Bloomberg News, Spain's debt load next year could reach 91% of economic output, up from 36% in 2007.
IMF's Lagarde says world leaders need to give Spain and Greece more time to resolve their debt problems.
"This is what I have advocated for Portugal, this is what I have advocated for Spain, and this is what we are advocating for Greece, where I said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation program that is considered," she argued.
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