The IMF vs George Osborne – the inside story
A few weeks ago, eagle-eyed Twitter users would have noticed a rather unusual tweet from one household name to another.
It was, it turns out, the only personal tweet that Christine Lagarde sent to any other finance minister in the run-up to this past week’s Spring Meetings in Washington DC.
This is no coincidence. Lagarde and Osborne really are good friends. They talk regularly (and not just on Twitter); they have a genuinely warm personal and professional relationship. Osborne was the first major finance minister to endorse Lagarde for her post as managing director of the International Monetary Fund and she, in turn, has always been steadfastly and publicly supportive of his economic policy.
Last summer, Lagarde made a personal appearance at the UK Treasury to unveil the Fund’s annual assessment of the British economy, and endorsed the Osborne economic plan. She memorably said that when she tried to imagine what the public finances would have looked like without the Chancellor’s austerity measures, “I shiver.”
Such interventions have been politically, if not economically, important for the Chancellor. They reinforce the notion that he is not merely an austerity obsessive: that his plans conform to mainstream economic wisdom. Like the support of a ratings agency, or indeed of economists like Carmen Reinhart and Ken Rogoff, IMF approval is a useful shorthand for economic credibility – something you need when you’re facing the longest slump in modern history.
And even as the Fund’s professional assessment of the UK economy’s health turned negative over the past year, Lagarde’s support for Osborne has remained unwavering. Earlier this week in Washington, the IMF chief economist, Olivier Blanchard said Osborne would have to reduce the pace of his spending cuts, adding that the Chancellor was “playing with fire”. The World Economic Outlook said, in black and white, that “greater near-term flexibility in the path of fiscal adjustment” was necessary in the UK – economese for “you need to consider plan B”.
And yet when asked about Britain, Lagarde offered a far more equivocal verdict: there was “nothing new” in the Fund’s assessment that the UK should be ready to change course if and when economic growth disappointed – though she conceded that “the growth numbers are not particularly good.”
This difference in tone has been useful for the Chancellor. When asked in a domestic press briefing about Blanchard’s criticism, Osborne quoted Lagarde’s comments at length, dismissing the chief economist as “just one voice”.
However, the reality, according to a range of Fund insiders, is quite the contrary. They point out that the institutional IMF view is far closer to Blanchard’s opinion than Lagarde’s. That in some respects it is Lagarde who is the outlier.
In fact, some Fund officials were privately aghast when they heard Lagarde claim in that press conference that there was “nothing new” in the Fund’s position on the UK. One told me that within the Fund some were muttering that Lagarde’s good relationship with the Chancellor – and her consequent efforts to be diplomatic – were undermining their overall message: that Britain must change course.*
Whether that message will actually make any difference is moot. Plenty of finance ministers have disagreed with the Fund in the past. The Americans did in the 1980s. Gordon Brown got angry with the Fund during his Chancellorship when it advised him to scale back on his borrowing. Likewise, Osborne is furious with Blanchard, considering that the chief economist has unfairly singled out Britain when other countries are just as worthy, if not more worthy, of the same criticism.
But that doesn’t change the fact that for the first time since taking office, he is now on the wrong side of the Fund. And if there were any doubt about the true IMF position, it has now been laid to rest by Lagarde’s deputy, David Lipton. In an interview with Sky News, he says, explicitly, that when it comes to Britain’s budget, “the pace of consolidation ought to be reconsidered”. The precise numbers, he signalled, would have to wait until the Fund’s official survey begins next month, but the verdict could hardly be clearer.
The intervention is particularly significant given who it has come from. Lipton is not a household name; he is not on Twitter. But not only is he Lagarde’s deputy, he is the man who will take her place to unveil the ominous findings of the IMF assessment in London next month. It’s enough to make George Osborne shiver.
* Although the MD did offer a slightly tougher message when pressed repeatedly in an interview with BBC Hardtalk later in the week.