Schäuble and Lagarde clash over austerity

(CNN) -- High-level splits over the handling of the eurozone crisis burst into the open on Thursday when Germany's finance minister rebuked the head of the International Monetary Fund after she warned that EU leaders should ease demands for tighter austerity in peripheral economies.

Wolfgang Schäuble said Christine Lagarde had appeared to contradict the IMF's own stance in advocating an easing of austerity, noting that the fund had "time and again" warned that high debt levels threatened economic growth.

"When there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction," Mr Schäuble said. "When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher."

Mr Schäuble spoke on the sidelines of a meeting of finance ministers and central bankers in Tokyo just after Ms Lagarde, the IMF managing director, backed a new study that found Brussels and the IMF had consistently underestimated the impact of austerity measures on economic growth during the eurozone crisis.

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Ms Lagarde said eurozone countries should not blindly stick to tough budget deficit targets if growth weakens more than expected. She argued that they should allow "automatic stabilisers" -- higher welfare spending and lower tax revenues -- to kick in if the economy deteriorated.

"It is sometimes better to have more time," Ms Lagarde said, noting that if countries tried to cut their budgets simultaneously it could multiply austerity's impact on the economy.

The IMF's warnings against an overreliance on austerity came as Angela Merkel, the German chancellor, held out the prospect of government action, including possible tax cuts, to stimulate domestic demand. Ms Merkel said she was determined to revive Germany's flagging growth, not least because of the country's role "to do something for the stimulation of the economy in Europe".

Eurozone leaders have called for tougher austerity measures in both Spain and Greece, even as their economies shrink rapidly. Both countries are expected to be discussed at a high-profile summit of EU leaders next week.

Ms Lagarde advocated giving Greece two more years to hit the tough budget targets contained in its €174bn bailout programme, becoming the most senior official publicly to back to a request from the government in Athens this summer.

Europeans are braced for a new age of austerity as governments across the region take action to eliminate unsustainable budget deficits

Her call for slower adjustment, coupled with a highly symbolic visit to Athens by Ms Merkel is a boost to Greece, which is trying to persuade its eurozone partners to give it more time. However, slower deficit reduction in Athens would mean Greece's international creditors would have to give it more help in a politically fraught overhaul of Greece's bailout programme.

Ms Lagarde said she also supported the European Commission's decision to give Spain another year to bring its budget deficit down to 3 per cent of economic output but she would not comment on whether Madrid should ask for extra financial assistance from the EU.

José Viñals, head of the IMF's monetary and capital markets department, appeared to warn Berlin against blocking any Spanish request for assistance. Mr Schäuble has insisted that Madrid does not need additional financing aid even as Brussels has been pushing it to ask for assistance.

Mr Viñals, in an interview with Reuters, said creditor countries, including Germany, should not "negate" a Spanish request that would activate the European Central Bank's new bond-buying assistance programme, bringing down Spanish borrowing costs. Yields on benchmark 10-year Spanish bonds fell nearly 1 per cent on Thursday despite an overnight downgrade by Standard & Poor's, the rating agency.