Snub and Switch
The International Monetary Fund (IMF) and The World Bank Group are meeting together this week, as they do formally once a year, this time in Tokyo. Finance ministers and central bankers, among others, all show up for these gatherings - except this year, with China (now the second-largest economy in the world) indicating they would not send their two top officials. The snub had nothing to do with the IMF's Annual Meeting, and everything to do with Tokyo. It seems that the current spat between China and Japan over the Diaoyu Islands, or as the Japanese call them, the Senkakus, is escalating. The simmering began last month, when the Japanese government announced they would buy three of the islands from their private Japanese owner. Chinese protests erupted right away at what was seen as yet another display of Japanese nationalism. Japanese car sales in China dropped so suddenly and precipitously that Toyota and Nissan temporarily shut five of their Chinese plants. Chinese tourists started going anywhere but Japan.
As significant as this growing China/Japan row has become - it is, after all, between the world's second- and third-largest economies - it is almost a side-show to what has just emerged in Tokyo as a remarkable switch in International Monetary Fund policy emphasis. The Fund has been, for decades - as it was mandated - the architect of, frankly, countless bail-out programs for near-bankrupt countries (often Latin American, but even , at times, developed countries like Britain), offering "stand-by" loans while governments implemented austere economic policies to regain solvency and international confidence. With European partners, it is currently doing just that in Greece (Back to Berlin). But here's the switch - earlier this week, Christine Lagarde, the former French Finance Minister who since last July has been the IMF's managing director, publicly highlighted a new IMF study arguing the social impact of austerity measures can be - underestimated. Front-loaded cut-backs may be counter-productive. Further, Ms. Lagarde commented, "we work (in Athens) looking at what can be done, what should be done...over a decent, reasonable period of time". She appealed for "a bit more time", as the coalition Greek government struggles to meet bail-out conditions. Adjustment timescales should vary, she said, according to "factors such as the volume of debt involved, and the degree of market pressure". And this - "adjustment is a marathon, not a sprint".
Ms. Lagarde's emphasis switch is stunning, and realistic. But, German officials aren't having it. They are facing massive electorate fatigue with seemingly endless Greek (and other) bail-outs. Already, in response to the managing director's comments, the German Finance Minister, Wolfgang Schauble, has been at pains (again, in Tokyo) to point out that, regarding the IMF, "there is no difference, Never. It is impossible. We always agree". Protesting quite a bit too much, I think.
Watch for the "troika's" report due early next month regarding Greek finances. It will tell whether the Germans or the IMF prevailed.