Cookie consent

We use cookies to improve your experience on this website. By continuing to browse our site you agree to our use of cookies. Tell me more | Cookie preferences

Schäuble and Lagarde clash over austerity

IMF chief: Austerity is hurting growth

    Just Watched

    IMF chief: Austerity is hurting growth

IMF chief: Austerity is hurting growth 03:30

Story highlights

  • High-level splits over the handling of the eurozone crisis burst into the open
  • Germany's finance minister rebuked the head of the International Monetary Fund
  • Christine Lagarde warned that EU leaders should ease demands for tighter austerity
  • Lagarde said eurozone countries should not blindly stick to tough budget deficit targets

High-level splits over the handling of the eurozone crisis burst into the open on Thursday when Germany's finance minister rebuked the head of the International Monetary Fund after she warned that EU leaders should ease demands for tighter austerity in peripheral economies.

Wolfgang Schäuble said Christine Lagarde had appeared to contradict the IMF's own stance in advocating an easing of austerity, noting that the fund had "time and again" warned that high debt levels threatened economic growth.

"When there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction," Mr Schäuble said. "When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher."

Mr Schäuble spoke on the sidelines of a meeting of finance ministers and central bankers in Tokyo just after Ms Lagarde, the IMF managing director, backed a new study that found Brussels and the IMF had consistently underestimated the impact of austerity measures on economic growth during the eurozone crisis.

Ms Lagarde said eurozone countries should not blindly stick to tough budget deficit targets if growth weakens more than expected. She argued that they should allow "automatic stabilisers" -- higher welfare spending and lower tax revenues -- to kick in if the economy deteriorated.

IMF chief: U.S. fiscal cliff a concern

    Just Watched

    IMF chief: U.S. fiscal cliff a concern

IMF chief: U.S. fiscal cliff a concern 02:21
PLAY VIDEO
Islands duspute hits trade

    Just Watched

    Islands duspute hits trade

Islands duspute hits trade 03:12
PLAY VIDEO
Chinese official leaves IMF meeting

    Just Watched

    Chinese official leaves IMF meeting

Chinese official leaves IMF meeting 02:01
PLAY VIDEO

"It is sometimes better to have more time," Ms Lagarde said, noting that if countries tried to cut their budgets simultaneously it could multiply austerity's impact on the economy.

The IMF's warnings against an overreliance on austerity came as Angela Merkel, the German chancellor, held out the prospect of government action, including possible tax cuts, to stimulate domestic demand. Ms Merkel said she was determined to revive Germany's flagging growth, not least because of the country's role "to do something for the stimulation of the economy in Europe".

Eurozone leaders have called for tougher austerity measures in both Spain and Greece, even as their economies shrink rapidly. Both countries are expected to be discussed at a high-profile summit of EU leaders next week.

Ms Lagarde advocated giving Greece two more years to hit the tough budget targets contained in its €174bn bailout programme, becoming the most senior official publicly to back to a request from the government in Athens this summer.

Europeans are braced for a new age of austerity as governments across the region take action to eliminate unsustainable budget deficits

Her call for slower adjustment, coupled with a highly symbolic visit to Athens by Ms Merkel is a boost to Greece, which is trying to persuade its eurozone partners to give it more time. However, slower deficit reduction in Athens would mean Greece's international creditors would have to give it more help in a politically fraught overhaul of Greece's bailout programme.

Ms Lagarde said she also supported the European Commission's decision to give Spain another year to bring its budget deficit down to 3 per cent of economic output but she would not comment on whether Madrid should ask for extra financial assistance from the EU.

José Viñals, head of the IMF's monetary and capital markets department, appeared to warn Berlin against blocking any Spanish request for assistance. Mr Schäuble has insisted that Madrid does not need additional financing aid even as Brussels has been pushing it to ask for assistance.

Mr Viñals, in an interview with Reuters, said creditor countries, including Germany, should not "negate" a Spanish request that would activate the European Central Bank's new bond-buying assistance programme, bringing down Spanish borrowing costs. Yields on benchmark 10-year Spanish bonds fell nearly 1 per cent on Thursday despite an overnight downgrade by Standard & Poor's, the rating agency.

      CNN Business

    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
    • A view of gloves and boots used by medical staff, drying in the sun, at a center for victims of the Ebola virus in Guekedou, on April 1, 2014. The viral haemorrhagic fever epidemic raging in Guinea is caused by several viruses which have similar symptoms -- the deadliest and most feared of which is Ebola. AFP PHOTO / SEYLLOU (Photo credit should read SEYLLOU/AFP/Getty Images)

      The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
    • People enter a casino in Las Vegas, Nevada, on April 18, 2009. Las Vegas is the most populus city in the US state of Nevada and internationally renowned major resort city for gambling, shopping, fine dining and entertainment. Las Vegas which bills itself as the �Entertainment Capital of the World� is famous for the number of casino resorts and associated entertainment. AFP PHOTO/Jewel SAMAD (Photo credit should read JEWEL SAMAD/AFP/Getty Images)

      Macau has overtaken Switzerland in the wealth stakes, being named the world's fourth richest territory by the World Bank.
    • spc marketplace middle east ata atmar a_00010015.jpg

      Saudi Arabian Bateel brand is best known for its delectable dates but it now has more than a dozen cafes and a new bakery in the works.
    • Vantablack designed by Surrey NanoSystems absorbs 99.96% of all light. It however will not be the solution to the creating the world's ultimate slimming black dress! A dress made out of this material would render the curves and contours of the human body invisible and would leave the wearer looking like 'two dimensional cardboard cut-out.'

      A British nanotech company has created what it says is the world's darkest material. It is so dark the human eye can't discern its shape and form.
    • Jibo robot is designed to be an organizer, educator and assist family members. CNN's Maggie Lake met him and says she was impressed with his skills.
    • A picture taken on March 15, 2014 shows children playing at the sprawling desert Zaatari refugee camp in northern Jordan near the border with Syria which provides shelter to around 100,000 Syrian refugees. Syrian refugees in the seven-square-kilometre (2.8-square-mile) Zaatari camp in Jordan fear that President Bashar al-Assad's likely re-election this year will leave their dream of a return home as distant as ever. The brutal war in Syria between the regime and its foes shows no sign of abating and has killed at least 146,000 people since it erupted in mid-March 2011. And 2.5 million Syrians have fled abroad and another 6.5 million have been internally displaced. Jordan is home to more than 500,000 of the refugees.

      Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
    • SHEFFIELD, ENGLAND - NOVEMBER 18: Queen Elizabeth II wears 3 D glasses to watch a display and pilot a JCB digger, during a visit to the University of Sheffield Advanced Manufacturing Research centre, on November 18, 2010 in Sheffield, England. (Photo by John Giles - WPA Pool/Getty Images)

      At the last football World Cup, it was all about 3D. This time around, it's nothing less than 4K.
    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Iraq produces 3.3 million barrels per day and has the world's fourth-largest oil reserves. But the current crisis is putting all this in danger.
    • Valves of gas pipe-line are seen in the gas station not far from Kiev on March 4, 2014. The European Union will help Ukraine pay the $2.0 billion it owes to Russian gas giant Gazprom, a top official said Tuesday, as part of an aid package reportedly worth more than one billion euros. AFP PHOTO/ ANDREY SINITSIN (Photo credit should read ANDREY SINITSIN/AFP/Getty Images)

      The gas standoff between Russia and Ukraine could have a knock-on effect on Europe. Explore this map to find out why is the EU nervous.