Europe’s recovery is at risk as the International Monetary Fund refuses to give way on fiscal goals, threatening to impede growth for bailout recipients like Hungary and Greece, the Center for Economic and Policy Research said.

The IMF and European Union on July 17 abandoned talks on the continuation of Hungary’s 20 billion euro ($26 billion) rescue program after Prime Minister Viktor Orban failed to convince lenders his government is committed to budget cuts. Orban last week said the country must “restore its economic self rule” and focus on growth. The fund is also demanding austerity measures of Greece in return for financial support.

Hungary’s dispute with the Washington-based fund over deficit reduction goals “does show that a certain lack of flexibility on the part of the IMF can be dangerous to the rest of Europe,” said Mark Weisbrot, co-director at the Washington- based center, whose advisory board includes Nobel laureates Robert Solow and Joseph Stiglitz, in a July 26 interview.

Weisbrot said the IMF’s presence in the financial package to support Portugal, Ireland, Italy, Greece and Spain — dubbed the PIIGS — may impose anti-growth policies across the region. The Greeks have adopted budget cuts and revenue raising measures equivalent to more than 14 percent of gross domestic product since October. Orban pushed for wider deficit than the 2.8 percent IMF-backed target for next year.

Disturbing

“The most disturbing thing is that the IMF is heavily involved now in the so-called rescue package for the PIIGS countries, to the extent that they have a certain level of influence that supports pro-cyclical policies,” Weisbrot said. “You do have the risk that the recovery will be avoided. That could have major repercussions for an area that’s about a quarter of the world economy.”

Euro-area governments are in the process of approving a 750 billion euro financial stability fund designed to boost confidence in the single currency and support euro members in need of funds. The IMF, which is a joint contributor with the EU to Greece’s bailout, is providing 250 billion euros to the regional rescue facility.

The euro has lost 14 percent against the dollar since a Nov. 25 high. Since the euro-area rescue was announced on May 10, the euro is up 1.9 percent, signaling investors support the austerity measures designed to reduce debt that are framed in the package.

Repercussions

At the height of the credit crisis the IMF provided about $65 billion of loans to eastern Europe, making it the largest recipient of the fund’s bailouts. The region required more than $100 billion in total, including contributions from the EU and the World Bank. The IMF has provided loans to Hungary, Latvia, Ukraine, Romania and Serbia as the countries faced defaults and struggled to refinance debt, often denominated in foreign currencies.

The IMF’s policies are “dangerous for eastern Europe too,” said Weisbrot. “To the extent that you don’t allow any of these economies to recover it can have repercussions for the rest of the region.”

Orban said his government will only negotiate with the EU on its fiscal targets after its IMF program expires in October. Orban said he expects credit-rating downgrades and market “turbulence” as a result of the cessation of IMF talks. Standard & Poor’s and Moody’s Investors Service last week said they may lower their ratings for the country’s debt. S&P’s cut would take the grade to junk. Tovább a folytatáshoz →