Tags: IMF | eurozone | hopelessly | wrong

UK Telegraph: IMF Is Wrong about the Eurozone

By    |   Thursday, 11 Oct 2012 01:06 PM

The International Monetary Fund has it "hopelessly" wrong on the eurozone, asserts the U.K.-based Telegraph.

The IMF has traditionally demanded that countries drastically and immediately slash government debt. Desperate for answers, it's now questioning that philosophy, according to The Telegraph.

In its latest World Economic Outlook report, the IMF says "fiscal multipliers" have been larger than expected, especially across many economies at the same time, The Telegraph stated. In other words, the impact of cutting spending has reduced economic growth more than thought.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

The latest information indicates that reducing deficits cuts economic growth twice as much a previously thought. Austerity might be actually costing economies more than it saves. IMF critics and peripheral eurozone countries saw the comment as vindication.

The methods governments use to control their deficits are crucial, the paper points out, and what works for one country might not work for another.

In addition, The Telegraph noted, "Higher taxes and cuts in capital spending have repeatedly been shown to be much worse for output than cuts in entitlements and other forms of current spending."

The United Kingdom has emphasized tax increases and capital spending cuts, which could explain why its recovery has been slow.

Eurozone countries, especially France, are stressing tax increases even more. "This is going to be very bad for growth going forward," the paper stated.

The difference between the United Kingdom and the eurozone is that the United Kingdom used loose monetary policy and currency devaluation to cushion the impact of spending cuts — not an option for the eurozone periphery.

Although eurozone countries need budget controls and structural reforms, the problem is the inability of eurozone countries to use loose monetary policy, The Telegraph said.

"Yet [the IMF] still cannot bring themselves to admit the true explanation, the one that stares them in the face — it’s the euro, stupid."

Many economists agree that the inability of eurozone members to devalue the euro is a major problem. Countries like Greece must increase exports to create jobs, writes New York Times columnist Paul Krugman, a vocal critic of the euro. But it cannot lower its costs of goods because it is stuck in the common currency.

Eurozone leaders have been unwilling to devalue the euro.

"Part of the problem may be that those policy elites have a selective historical memory. They love to talk about the German inflation of the early 1920s — a story that, as it happens, has no bearing on our current situation," Krugman wrote in his column last year.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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The International Monetary Fund has it "hopelessly" wrong on the eurozone, asserts the U.K.-based Telegraph.
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Thursday, 11 Oct 2012 01:06 PM
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