One of the subplots from last week's International Monetary Fund spring meetings was evidence that the Fund's leadership has turned sour on Britain's austerity program. During the release of the Fund's World Economic Outlook, IMF chief economist Olivier Blanchard expressed concern that austerity has now gone too far. "In the face of very weak private demand," he said, "it is clearly time to consider adjustment to the initial fiscal consolidation plans." (Playing good cop to Blanchard's bad cop, managing director Christine Lagarde was significantly more cautious in her comments on the issue and insisted that Fund policy had not changed.)
If it were so inclined, the IMF could become a serious political liability for the Cameron government as it defends an economic program that is already unpopular. The Guardian reports today that Chancellor George Osborne is not concerned:
Osborne has laughed off suggestions he is in a state of panic about the slow rate of Britain's economic recovery, denying that the International Monetary Fund (IMF) has rejected his austerity policies.
He said the full verdict of the IMF would come in May, when it visits the UK to make a complete assessment, adding that the recently reported critical views of the IMF chief economist, Oliver Blanchard, represented the views of only one man....
Osborne said of Blanchard: "He is one voice. He has a well-known set of views on this that he has expressed over several years. The IMF will do its analysis of the British economy as it does of all economies when it comes to Britain in May."
The May analysis that Osborne refers to is the Fund's regular "surveillance" report. A team of IMF experts will in the next few weeks arrive in London and conduct a thorough review of Britain's economic and fiscal position. They will then submit a confidential report to the Fund's executive board, which will debate it. Along the way, however, the British government will be able to request amendments, corrections, and deletions. By the time the surveillance report sees the light of day, there's very little chance it will include anything like a direct indictment of British fiscal policy; the IMF simply isn't in the business of directly and publicly confronting major shareholders.
The deeper question may be whether Blanchard's views and those the IMF privately communicates will influence British policymakers. Not long ago, the Fund examined the question of whether its function as a "trusted advisor" to member states is a meaningful one. That report identified tension between its roles as watchdog for the global financial system and advisor to sovereign governments and between the need for transparency and the continued importance of confidential discussions. The report found that most countries want the Fund to be candid--but in private:
Most country authorities wanted candor (“ruthless truth-telling”) from IMF staff in their private discussions with them. They wanted to be able to have an exchange of views without concerns about disclosure, particularly on sensitive issues. At the same time, they recognized that transparency contributed to increased effectiveness and accountability, for boththe member country and the IMF. In this regard, most expressed satisfaction with the IMF’s transparency policy and treatment of confidential issues. Many noted that they trusted Fund staff to use good judgment in not publicly disclosing issues in counterproductive ways.
The satisfaction of major governments with the Fund is a precious commodity, and intervening too forcefully in fraught domestic debates is a sure way to forfeit it. In short, it's very likely that Blanchard's statements are about as far as the Fund will go in criticizing Britain's austerity program. George Osborne may have reasons to panic, but the IMF isn't one of them.