World leaders set for fraught IMF meeting


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World leaders and financial policymakers arrive in Washington this week for the annual meeting of the International Monetary Fund with the global economy balanced on the edge of a precipice.

The focus will be on two crucial reports. First, today, the IMF is expected to downgrade its official global growth projections for 2011 in its World Economic Outlook. The blame is likely to fall on the uncertainty generated by the eurozone sovereign debt crisis and the shock of the Japanese tsunami. Second, tomorrow, the fund will give its perspective on the state of the world's financial sector. Of particular interest will be the organisation's view on the health of European banks, which have considerable holdings of debt from the struggling eurozone periphery.

The latter subject has been rather like a game of spin the bottle in recent weeks. Last month, the new managing director of the IMF, Christine Lagarde, said that the eurozone's banks urgently needed new capital. But she seemed to retreat from that position at the G7 meeting in Marseille two weeks ago, after lobbying from irate European politicians who did not like being told their banks are insolvent. We should find out this week where the IMF bottle is pointing when it comes to the condition of the world's banks.

We should also find out more about the IMF's prescription for the world economy. Last month, Ms Lagarde stunned international policymakers by calling on nations with scope to borrow to stimulate their economies with short-term spending. This was a remarkably Keynesian call coming from the head of an organisation that has generally taken the view that deficit reduction should always comes first.

There have been other signs of the IMF taking a more Keynesian outlook of late, too. An IMF paper last month said: "We know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. Hence the potential longer-run benefits of fiscal consolidation must be balanced against the short and medium-run adverse impacts on growth and jobs." In other words: "Do not cut too much, too soon".

The IMF's delegate in Athens, Bob Traa, nevertheless took an extremely tough line yesterday. According to the Greek media, the fund is demanding an extra 20,000 public sector lay-offs, despite signs that austerity is pushing Greece into a depression. There would appear to be strict limits to the IMF's new-found Keynesianism.