The EU wrapped up its summit, and the major policy announcement was an agreement for a single Eurozone bank regulator, a step on the road to common depository insurance. This is a couple years off, and leaders announced that no country would be able to get bailout funds for its banks until the regulator was in place, which could pressure Spain into tapping that bailout fund for its government operations, if they’re on the hook for rescuing their own banks in the near term. In addition, Germany and France appear divided over the next steps on fiscal integration, with Germany emphasizing budget discipline and France warning against recession.

But I want to focus on this remarkable statement from the IMF, a complete rebuke of the analysis of their own organization from just a week ago. At that time, the IMF released analyses showing that the fiscal multiplier for austerity was bigger than they thought, meaning it was more damaging to economies that engaged in it, especially in the midst of a recession. Presumably they would associate this new data to assessing Portugal’s austerity plans, which include a large tax increase. In fact, just a couple weeks ago, the IMF warned against austerity in Portugal as potentially counter-productive, citing the risk of recession as higher than the risk of more debt.

But I guess that didn’t hold, because now the IMF describes the Portuguese austerity program as “imperative.”

The International Monetary Fund has intervened in the heated debate in Portugal over the balance between austerity and economic growth, saying that fiscal adjustment is “imperative and needs to continue”.

In a note issued in Washington late on Wednesday, Abebe Selassie, head of the IMF mission to Portugal, said fiscal adjustment was necessary in countries with “a high debt burden and limited recourse to financing – the situation in which Portugal finds itself now”.

It’s as if their research just never happened. The IMF seemed to take a more dovish line on deficits, but only in theory. The moment that theory met practice, they jettisoned the theory in favor of their traditional view of more pain for ordinary people.

Selassie added that Portugal “need(s) to undertake fiscal adjustment, paying heed as much as possible to the impact on growth and other macroeconomic variables”. Well, that’s nice. I’m sure their citizens will be paying attention as their jobs are eliminated and wages slashed.

Remind me to watch what the IMF does rather than what they say in the future.

David Dayen

David Dayen