While concerns about Europe’s health eased in recent months after political and economic leaders took new steps to contain the problems, anxiety has been on the rise again lately.
The cost Spain faces for borrowing money has been increasing amid doubts about whether it can control spending while also rekindling economic growth. The government successfully sold around $4 billion of short-term bonds on Tuesday — but the interest rate Spain must pay to attract investors has nearly doubled in a month.
After a short respite, euro-zone officials are again seeking to reassure financial markets, calling on investors to be “rational” and assuring that Spain will successfully carry out promised economic overhauls.
The IMF has often warned countries that “fiscal consolidation” could hurt growth, but the message delivered Tuesday was more explicit.
Carlo Cottarelli, the IMF’s fiscal affairs director, said many developed countries should focus on gradually reducing their heavy debt loads rather than trying to take dramatic steps aimed at bringing debt down to the relatively low levels that preceded the 2008 global financial crisis.
The agency’s research has implications for the U.S. IMF officials said that steep tax increases scheduled to kick-in next year were “excessive.” IMF officials urged the U.S. to find ways to spread deficit reduction over several years and thus avoid harming short term growth.
For countries like Spain, government austerity has failed to deliver lower interest rates and a rebound in private economic activity.
At a Tuesday news briefing, IMF economic counselor Olivier Blanchard said that European nations have been pressured by investors to control public borrowing, then pressured as well when budget cuts led to faltering growth. “You’re damned if you do, damned if you don’t,” he said.
In Spain, where the government of Prime Minister Mariano Rajoy is battling to meet strict deficit targets, “a slightly more moderate adjustment . . . would have been preferable,” the IMF said in its latest Fiscal Monitor, an overview of public debt issues.
Bank of Spain governor Miguel Angel Fernandez Ordonez said in Madrid on Tuesday that the government was intent on meeting deficit targets set in consultation with other European nations, most notably Germany, which has pushed for stricter fiscal discipline throughout the euro region.
“Things will get much worse if Spain doesn’t reach the budget deficit targets,” Ordonez told the Spanish parliament, according to wire service reports. The country’s economy, the fourth biggest in the euro zone, is expected to shrink by 1.9 percent this year and barely eke out growth, of 0.1 percent, in 2013, according to the latest IMF projections.