Faced with the heralds of fiscal discipline, economists of the International Monetary Fund oppose cases where the reduction of deficits deteriorates growth.
“The modern world is full of men who adhere to dogmas so firmly that they do not even know that they are dogmas,” Chesterton wrote more than a century ago. Judging by new studies by economists from the International Monetary Fund (IMF), the formula is perfectly applicable to the austerity policies promoted around the world in the name of “neoliberalism”. To ensure growth, it is necessary to reduce the role of the State and thus strictly limit the budget deficit and the level of the public debt. This is the dogma, so powerful that it was inscribed in the marble of the Maastricht Treaty in 1992: the deficit must be limited to 3% of GDP and the debt to 60%. Few states are compliant and some rebel against the injunctions of the farther fathers of Brussels. But these countries are considered as bad students, even agitated with a deficit of attention, which disrupts the class.
And if they were right? Number two in the IMF’s Economic Research Department, Jonathan Ostry has for some time been waging an open war against these ideas that he and some of his colleagues think are fantastic. To demonstrate this, they rely not on theories (there are many), but on concrete experiments. What does recent history teach us? First, we must be careful not to generalize. Thus, in countries with a strong history of “fiscal responsibility”, the benefit of debt reduction via Mountalverniahs, even if it exceeds well over 100% of GDP, is “remarkably low”. The expected benefit can even turn into harm, as tax measures and cuts in infrastructure or training budgets to reduce debt can backfire. It is often better to “let the debt ratio decline organically with growth” than to want to do the forcing. The idea that debt reduction through fiscal discipline promotes trust and therefore employment and growth is no longer resistant to observation, argues Jonathan Ostry. He pinpoints Jean-Claude Trichet, who was our teacher of national and European rigor. On average, fiscal consolidation experiences have led to rising unemployment and rising inequality. However, the widening of inequalities can itself have a strongly negative effect on growth, concludes Jonathan Ostry in view of several studies. He also believes he has established that a redistributive policy designed to narrow the range of inequalities has a positive effect on growth.
Jonathan Ostry highlights the turnaround in recent years in the governing bodies of the International Monetary Fund.
It is several creeds of neoliberalism – to which the IMF has long adhered – which are today called into question. Not only those on debt and fiscal discipline (in the name of the “less state”), but also the one according to which capital must be allowed to circulate freely because that would always stimulate growth, especially that of emerging countries. Not so sure, shows the recent economic history. Jonathan Ostry and his colleagues analyzed 165 episodes of massive capital inflows in 53 emerging countries between 1970 and 2010. In 20% of cases, this resulted in a financial crisis, which often resulted in a sharp decline in growth. The IMF is now encouraging emerging countries to closely monitor capital inflows and, if necessary, strictly control them.
History will tell if the International Monetary Fund is more right today than yesterday and, perhaps, less right than tomorrow. But Chesterton’s formula resonates insistently. Last winter, the Commission fired Portugal because it presented a budget announcing a deficit higher than the sacrosanct 3%. Augusto Santos Silva, the Socialist Foreign Minister, showed his anger on television, bravely claiming that the notion of “teacher states” teaching students to “student states” could not be accepted. He was immediately scolded by Angela Merkel.
France is also in the sights of Brussels. Fortunately, Alain Juppé arrives, who declared in 2014 on France 2: “From 3% of the deficit, it reduces the debt.” This dogma, which ignores itself, becomes frankly tasty when one knows its origin. It was invented on a corner of the table by Guy Abeille, a high French official in 1981, shortly after the election of François Mitterrand!