Opinion

The IMF’s false confession

Lagarde's apology for the IMF’s poor forecasting of the United Kingdom’s recent economic performance - and, more seriously, for the Fund’s longer-standing criticism of the fiscal austerity pursued by Prime Minister David Cameron’s government - was unprecedented, courageous, and wrong. Now endorsing British austerity, Lagarde said that it had increased confidence in the UK’s economic prospects, thereby spurring the recent recovery.

By: Date: October 14, 2014 Topic: European Macroeconomics & Governance

This article was originally published in Project Syndicate’s site.

“Do I have to go on my knees?” the International Monetary Fund’s managing director, Christine Lagarde, asked the BBC’s Andrew Marr. Lagarde was apologizing for the IMF’s poor forecasting of the United Kingdom’s recent economic performance, and, more seriously, for the Fund’s longer-standing criticism of the fiscal austerity pursued by Prime Minister David Cameron’s government. Now endorsing British austerity, Lagarde said that it had increased confidence in the UK’s economic prospects, thereby spurring the recent recovery.

Lagarde’s apology was unprecedented, courageous, and wrong. By issuing it, the IMF compromised on an economic principle that enjoys overwhelming academic support: The confidence “fairy” does not exist. And, by bowing to the UK’s pressure, the Fund undermined its only real asset – its independence.

The IMF has dodged responsibility for far more serious forecasting errors, including its failure to anticipate every major crisis of the last generation, from Mexico in 1994-1995 to the near-collapse of the global financial system in 2008. Indeed, in the 6-12 months prior to every crisis, the IMF’s forecasts implied business as usual.

Some claim that the Fund counsels countries in private, lest public warnings trigger the very crisis that is to be avoided. But, with the possible exception of Thailand in 1997, the IMF’s long-time resident historian, James Boughton, finds little evidence for that view in internal documents. The IMF’s Internal Evaluation Office is more directly scathing in its assessment of the Fund’s obliviousness to the US subprime crisis as it emerged.

Given that the IMF is the world’s anointed guardian of financial stability, its failure to warn and preempt constitutes a far more grievous lapse than its position on British austerity, with huge costs borne by many, especially the most vulnerable. For these failures, the Fund has never offered any apology, certainly not in the abject manner of Lagarde’s recent statement.

The Fund does well to reflect on its errors. In a September 2003 speech in Kuala Lumpur, then-Managing Director Horst Köhler conceded that temporary capital controls can provide relief against volatile inflows from the rest of the world. He was presumably acknowledging that the Fund had it wrong when it criticized Malaysia for imposing such controls at the height of the Asian crisis. Among the countries hurt by that crisis, Malaysia chose not to ask for the Fund’s help and emerged at least as well as others that did seek IMF assistance.

Malaysia’s imposition of capital controls was a controversial policy decision. And even as the Fund opposed them, prominent economists – among them Paul Krugman – endorsed their use. In his speech, Köhler reported that the Fund had taken the evidence on board and would incorporate it in its future advice.

But in the current crisis, the academic evidence has overwhelmingly shown that fiscal austerity does what textbook economics says it will do: the more severe the austerity, the greater the drag on growth. A variety of studies confirming this proposition, including one by the IMF’s chief economist, Olivier Blanchard, have withstood considerable scrutiny and leave little room for ambiguity.

The two public voices arguing for the magical properties of austerity are official agencies based in Europe: the OECD and the European Commission. The Commission’s stance, in particular, is animated by an institutional commitment to a fiscal viewpoint that leaves no room for evidence.

Among the G-7 economies, only Italy has done worse than the UK since the Great Recession began. Indeed, the UK’s GDP has only just regained its 2008 level, lagging behind even France.

This is all the more remarkable given that the crisis in the UK was comparatively mild. The fall in property prices was modest relative to Ireland and Spain, and, because there was no construction boom, there was no construction bust. Having missed the warning signs about the bank Northern Rock, which needed to be bailed out by the UK government after a run on its deposits in September 2007, the British authorities, unlike their eurozone counterparts, quickly dealt with the economy’s distressed banks. For these reasons, the UK should have had a quick recovery; instead, the Cameron government’s gratuitous austerity stifled it.

The IMF’s apology was a mistake for two reasons. Thumbing one’s nose at scholarly evidence is always a bad idea, but it is especially damaging to an institution that relies so heavily on the credibility of its technical competence and neutrality. If the Fund embraces muddled economics, on what basis will it defend its policy advice?

Moreover, in choosing to flatter the UK’s misguided policy, the Fund has confirmed its deference to its major shareholders. For years, the view has been that the IMF is a foreign-policy instrument of the United States. The softness in its annual surveillance of UK economic policy has also been well known.

But in taking this latest step, the Fund has undermined – perhaps fatally – its ability to speak “truth to power.” If so, a fundamental question may well become unavoidable: Why does the IMF exist, and for whom?

Read more on the IMF’s forecasts

Looking past the (West’s) end of the nose

The global economy’s Groundhog Day

Chart: IMF forecasts euro area inflation to stay well below 2% target for years to come

New IMF growth forecasts: EU revised downward, once again


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Podcast

Podcast

Unboxing the State of the Union 2021

In this Sound of Economics Live episode, Bruegel experts look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 15, 2021
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Unboxing the State of the Union 2021

In this Sound of Economics Live episode, we look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

Speakers: Grégory Claeys, Maria Demertzis, Alicia García-Herrero and Giuseppe Porcaro Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 15, 2021
Read article More on this topic More by this author
 

Opinion

Making supply chains more resilient

After the current global semiconductor shortage, business leaders and policymakers must think now about how to minimise the effects of future exogenous shocks on production networks and the global economy.

By: Dalia Marin Topic: Global Economics & Governance Date: September 14, 2021
Read about event More on this topic
 

Upcoming Event

Sep
23
14:00

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: European Macroeconomics & Governance
Read article More on this topic
 

External Publication

EU-India trade relations: assessment and perspectives

In-depth analysis prepared for the European Parliament's Committee on International Trade (INTA).

By: Suman Bery, Sonali Chowdhry, Alicia García-Herrero and Niclas Poitiers Topic: Global Economics & Governance Date: September 10, 2021
Read article Download PDF More on this topic
 

Policy Contribution

A green fiscal pact: climate investment in times of budget consolidation

Increasing green public investment while consolidating deficits will be a central challenge of this decade. A green fiscal pact would address this tension, but difficult trade-offs remain.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 9, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A Late Bloomer: where is China’s climate plan?

The world awaits China's concrete plan on carbon reduction, but the country is following its own pace.

By: The Sound of Economics Topic: Global Economics & Governance Date: September 8, 2021
Read article More on this topic More by this author
 

External Publication

What is behind China's Dual Circulation Strategy?

China's dual circulation strategy should not be dismissed as a buzzword: its implementation will entail major consequences.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 7, 2021
Read about event More on this topic
 

Past Event

Past Event

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

An in-depth look at the Italian Recovery and Resilience Plan

Bruegel Annual Meetings, Day 2 - A discussion of the largest national recovery plan.

Speakers: Carlo Altomonte, Declan Costello and Zsolt Darvas Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read about event More on this topic
 

Past Event

Past Event

Navigating a more polarised world: policy implications

Bruegel Annual Meetings, Day 2 - Are we entering a new age in the relationship between international economics and global politics? Is Europe well-equipped for this new world?

Speakers: Hélène Rey, Jean Pisani-Ferry, Adam Tooze and Sabine Weyand Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Load more posts