The International Monetary Fund has warned that austerity programs in Europe’s most troubled economies could have political limits, as resistance grows in Greece and Portugal over their bailout terms.
In a briefing made for the November 4-5 meeting of G20 leading economies in Mexico and released Thursday in Washington, the IMF said that financial conditions in the eurozone «remain fragile» and there are risks that countries asking for support will be unable to fulfill adjustment demands made on them.
It said that troubled countries may be prevented by «political economy factors» from moving in a timely fashion to request needed support from the European Stability Mechanism and the European Central Bank’s new OMT bond-buying support operations.
“Another risk is that austerity may become politically and socially untenable in periphery countries, as structural and fiscal reforms will still take years to complete,» the IMF report said.
The IMF said that recent policy actions, like the OMT program and the launch of the ESM, had eased some financial stress in the eurozone.
“Financial markets have experienced welcome respite recently and there are signs that the pace of activity has picked up relative to the second quarter,» it said in the briefing for Group of 20 finance ministers.
“Nonetheless, the global economy remains vulnerable to new setbacks,» it said, mentioning political battles over fiscal adjustment in the United States and Japan.
“While downside risks may have diminished somewhat lately, they still appear much higher than half a year ago, it said.
In Europe, it said, if financial stress surges again, pressure would mount on governments to expand austerity operations to keep their budgets under control, «resulting in larger GDP losses and significant spillovers on other economies.”
The warning came as Greece in particular seeks an easing of the targets of its austerity program and its debt terms to reverse a deep recession.