IMF is unrepentant in its view that governments cut public spending even though, for the worst hit nations like Britain, there is a direct impact on growth
There is a wait-and-see approach among top officials the IMF. Wait and see what happens next in Europe and wait and see how the US tackles its so-called fiscal cliff.
Optimists at the top of the organisation believe an agreement on closer co-operation and debt sharing in Europe, alongside a congressional deal in the US to limit the impact of tax rises and spending cuts due in January, is possible and will put the world economy back on a path to growth and recovery.
Olivier Blanchard, the IMF's chief economist, singled out Europe and the US for criticism during the annual conference in Tokyo, though as an optimist, he said there were signs that both were edging towards deals that would end the current uncertainty.
The focus on Europe and the US is understandable. Despite talk of a globalised world, the crux of the dilemma faced by the Washington-based bank is that without growth in Europe and the US, every other country suffers.
China is the prime loser from a slowdown in the west for the simple reason that it remains dependent on exports. While it has made efforts to develop a more rounded economy and bigger welfare state, Beijing depends on foreign buyers for its income.
Yet the debts run up by Europe and the US since the financial crash leave them in a position where conventional wisdom says they must favour government spending cuts over measures to spur growth.
The IMF is unrepentant in its view that governments cut public spending even though, for the worst hit nations like Britain, there is a direct impact on growth.
Carlo Cottarelli, boss of the IMF's fiscal affairs department, was clear that anyone criticising the speed and depth of public spending cuts should consider the costs of not doing it, namely that international money markets would punish them with sky high borrowing costs.
It is an argument we have heard many times. It is George Osborne's main defence when critics from the left accuse him of slowly sinking the economy under the weight of cuts that undermine confidence and private investment.
But it is not one that rings true in the US or Japan, which have kept spending high and are still considered safe bets by the investor community.
The UK has equally low borrowing costs. Is that because it also squeezes into the too-big-to-fail camp, or because it has pursued austerity?
A quick look at the IMF's fiscal monitor shows the trade-offs between growth and deficit reduction have put the UK and US in roughly the same position as far as their annual spending deficits go.
In the last two years, the US has grown consistently, but overspent more. The UK has not grown at all, but has cut further.
The US is predicted to end 2012 with roughly the same annual deficit, but gets a bigger economy than it had two years ago, while the UK has shrunk. The US national income is greater than before the crash, the UK's remains 4% below the peak.
So if a country can confront investors in a game of chicken and win, an expansionary policy makes sense. The benefits of higher tax revenues and lower unemployment costs help reduce deficits. Only anxious investors can spoil the party.
The eurozone could pull off the same trick if countries could stick together. Two years ago there was an opportunity to follow the US. Hanging together would have kept borrowing costs low and allowed government to keep borrowing while private business recovered. There was general agreement except for Germany and a small cohort of right wing governments in Finland, Holland, and Austria.
The IMF expects the eurozone to achieve the unity this year or next that it has failed to find in the last two. It cannot explain how, except to say that there appears to be more willingness to help each other.
Unfortunately for Spain, Portugal and Greece, the northern eurozone members are the investor community. It is their banks that hold much southern European debt. They are the panickers.
And only as long as the south is prepared to impoverish its people will they get solidarity. Setting aside the fact that this strange concept of solidarity is deeply flawed, mainly because it will take a huge amount of repression by Europe's elites to push it through, the IMF's optimism is based on Europe becoming, in the eyes of investors, too big to fail.
So surely the IMF is in favour of battling the money markets to allow spending to increase?
No, says Cottarelli, who was clear in his press conference that he could not think of any countries in a position to increase public spending.
In answer to arguments put by economist Paul Krugman and others that cheap borrowing – because you are a country that is too big to fail – offers an opportunity to invest cheaply for future growth, he said the risk still existed that investors/lenders would panic at a later stage and jack up interest rates. So even if it is safe now, it may not be safe in a few years when total borrowing would be stratospheric and an increase in borrowing costs crippling.
He said that for the US to borrow more would put the world economy on a knife edge.
For the IMF to advocate that countries be scared of the markets is bizarre, when all that happens is that one country after another finds itself with such low growth that it needs a loan from the IMF.
The US, the UK and most of the eurozone avoid this humiliation by printing money and devaluing their currencies. Yet even that is not enough and means all these vital economies will be borrowing more and IMF advice will exacerbate the problem.
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