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BP 14 IMF Website

BP 14 IMF Website

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Published by: Bruegel on Oct 31, 2011
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48The IMF appropriately assessed the macroeconomic risk to the global economy.
The Fund pointed to the severity of the financial crisis and its implications. It rightly
emphasised that the global deleveraging process had strong implications for global
demand, and that together with the risks in the financial system and the trade
decline, a repeat of a global Great Depression was a distinct possibility. In view of
this global risk, the Fund urged countries around the globe to enact significant
demand-side policies.

49As regards monetary policy, the right course for action was debated in the summer
of 2008, with the Fund making a positive contribution.
While Fund staff noted that
indicators of inflationary pressure and activity would likely soften, thereby
justifying an easing of monetary policy, the ECB pushed back strongly on this,
arguing that wage pressure was building up37

. The ECB decision to tighten in July
2008, which in retrospect can be judged a mistake, was therefore assessed as not
appropriate by the IMF. The IMF thus played a positive role in sounding a warning
on the downside risks to the euro-area economy. The staff report maintained this
scepticism about the monetary tightening, and stated that the case for keeping
rates on hold was “compelling”.

50As regards the aggregate fiscal policy stance, the IMF advice given to the euro
area was appropriate and timely.
The Fund urged euro-area economies to enact a
significant fiscal expansion. This policy advice was appropriate given the risks to
the global economy. The IMF was among the first institutions to understand the
severity of the crisis and to call for a strong macroeconomic policy response38

. The

advice helped to significantly shape the debate in the euro area on fiscal policy.

51However the Fund did not sufficiently differentiate its advice on fiscal expansion
for the different euro-area countries, thereby contributing to the build-up of
vulnerabilities.
The Fund made the general point that fiscal policy needs to be

39.See for example interview ‘Transcript of a Conference Call on the November 2009 Cross-Country Fiscal Monitor,’
with Carlo Cottarelli, Fiscal Affairs Department Director, November 3, 2009, Washington DC. Available at:
http://www.imf.org/external/np/tr/2009/tr110309.htm.

IMF SURVEILLANCE OF THE EURO AREAAN EVALUATION

25

differentiated according to fiscal space. While the advice for the euro-area
aggregate was appropriate, the differentiation message was not sufficiently broken
down across countries and remained general. In the euro-area Article IVs, message
on differences in fiscal space given in 2008 and 2009 were weak or absent. In the
case of Spain, even the April 2009 Article IV is rather cautious, and does not sound
a clear warning on fiscal difficulties. The risks stemming from implicit liabilities in
the financial sector are not mentioned prominently either. In its assessment, the
Fund also missed the fact that fiscal revenues in Spain were artificially high before
the crisis and that the structural deficit was correspondingly larger, and
significantly so (see Box 2 on the next page). This could have been seen in real
time. Only in the late autumn of 2009 did the Fund shift direction and become
much more cautious on fiscal policy39

. By May 2010, very strong warnings were
issued: deep and frontloaded fiscal policy retrenchment measures were called for,
and it was recommended that budget plans be based on more prudent
macroeconomic forecasts.

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