New study concludes IMF pursuing policies that damage recovery efforts in European countries

A new study from the Center for Economic and Policy Research (CEPR) raises very serious questions concerning the approach to recovery being followed by the ‘troika’ in EU countries including Ireland. The CEPR Co-Director Mark Weisbrot claims this study shows that “… the IMF appears to be pursuing a political and ideological agenda in Europe, with a very strong prejudice toward spending cuts and smaller government,”

This study analyses the IMF in particular and concludes that it has repeatedly emphasized cutting spending, including on public pensions and health care, and raising the retirement age - despite the pro-cyclical nature of some of these policies and despite the already severe impact of the economic recession confronting Europe.

The study, entitled ‘Macroeconomic Policy Advice and the Article IV Consultations: An EU Case Study’, finds a consistent pattern of policy recommendations coming from the IMF, which indicates:

1. A macroeconomic policy that focuses on reducing spending and shrinking the size of government, in many cases regardless of whether this is appropriate or necessary, or may even exacerbate an economic downturn; and
2. A focus on other policy issues that would tend to reduce social protections for broad sectors of the population (including public pensions, health care, and employment protections), reduce labour’s share of national income, and possibly increase poverty, social exclusion, and economic and social inequality as a result.

The Washington-based progressive think-tank analysed policy advice given by the IMF to the 27 European Union countries in 67 formal (Article IV) agreements for the four years 2008-2011. In particular the study examines IMF policy recommendations to see whether they have contributed to the on-going crisis in Europe, and also how they might affect other European Union goals such as those of Europe 2020, which seeks to reduce social exclusion, promote public investment in research and development, and promote employment and education.

The IMF is part of the “troika” – with the European Commission (EC) and European Central Bank (ECB) - that has been deciding or strongly influencing economic policy in the Eurozone, as well as affecting policy in the rest of the European Union, especially since the world economic crisis and recession of 2008-2009.  This study raises questions as to whether the IMF’s policy advice has contributed to the on-going economic problems in Europe.

Europe remains mired in its second recession in three years, and the International Monetary Fund’s (IMF’s) most recent (October 2012) World Economic Outlook (WEO) sees its problems as perhaps the most important drag on world economic growth. 

The CEPR study notes that the IMF has repeatedly been overly optimistic in its economic growth projections for crisis-hit EU countries and argues that in some cases downturns have been worsened as spending cuts and other austerity measures have been implemented.

The study also finds that the International Monetary Fund (IMF) has been pushing for reduced spending, shrinking government, and cutting social protections for broad sectors of the population in Europe Union member countries, often regardless of a country’s specific economic circumstances.

The study focuses on Article IV consultations, which provide recommendations on a broad range of issues including fiscal, monetary, and financial policy; health care and pensions; labor market policy (including wages, unemployment compensation, and employment protections); and numerous other policy issues. Fiscal adjustments, employment generation and social protection are particular areas of scrutiny.

Last week the IMF released updated economic growth projections for the world, noting that “that the euro area continues to pose a large downside risk to the global outlook.” The IMF downgraded its 2013 forecast for the euro area, now expecting it “to contract slightly.” But instead of recognizing the danger of austerity and pro-cyclical policies in Europe, the IMF recommends staying the course, saying that “the risk of prolonged stagnation in the euro area would rise if the momentum for reform is not maintained.”

The CEPR study notes that the IMF has repeatedly been overly optimistic in its economic growth projections for crisis-hit EU countries such as Greece and Spain, whose downturns have been worsened as spending cuts and other austerity measures have been implemented.

“The IMF is of course the junior partner in the troika, with the European Commission and European Central Bank calling the shots,” CEPR Co-Director Mark Weisbrot noted. “But they are still an important influence, and these consultations show that their influence, together with their partners, has been unnecessarily harmful for the people of Europe, who are struggling with unemployment and recession.”

The Center for Economic and Policy Research (CEPR) is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. CEPR's Advisory Board includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Janet Gornick, Professor at the CUNY Graduate Center and Director of the Luxembourg Income Study; and Richard Freeman, Professor of Economics at Harvard University.

The Center for Economic and Policy Research website may accessed here.  http://www.cepr.net/

Macroeconomic Policy Advice and the Article IV Consultations: An EU Case Study’ can be downloaded below