TOKYO – Germany held firm on Friday in insisting it was too soon to say Greece deserved more time to meet its deficit-cutting goals even as the head of the International Monetary Fund laid out the case for leniency.
Although Greece, Spain and the euro zone's slow progress toward debt reform was centre stage at International Monetary Fund meetings, there were some signs that Europe was edging forward in tackling the three-year old debt crisis.
The EU's top economic official for the first time indicated how possible aid for Spain could work and a European Central Bank policymaker endorsed a suggested extension of Greece's budget deadlines.
This week, in a softening of earlier advice, the IMF has argued that forcing Greece and other debt-burdened countries in Europe to reduce their deficits too quickly is counter-productive because it hurts the economy.
IMF Managing Director Christine Lagarde, sitting next to Germany's finance minister, said Athens needed more breathing space.
"Given the... lack of growth, given the market pressure, given the efforts that have been undertaken, a bit more time is necessary," she said, amplifying on remarks made on Thursday.
Any steps that would raise Athens' chances of succeeding were welcome, European Central Bank board member Benoit Coeure said. But he noted that a mooted two-year extension of Greece's budget balancing goal would come at a price of extra financing needs.
The shift was welcomed by some emerging market countries as well as long-time critics who say that the tough conditions attached to IMF loans make it harder for countries to grow their way out of debt.
"We have been arguing for some time that single-minded and draconian fiscal policies may be counterproductive and have a tendency to backfire," said Brazilian Finance Minister Guido Mantega.
In a sign that growth was a top concern, Canadian Finance Minister Jim Flaherty told reporters on a conference call that some finance ministers at the meetings had discussed the possibility of additional fiscal stimulus if Europe's economic travails worsened. He did not give any details.
QUESTION OF CREDIBILITY
But Germany, Europe's largest creditor country and the key to any lasting fiscal reforms, warned against actions that could undermine credibility of deficit-cutting steps.
Finance Minister Wolfgang Schaeuble said Europe had made plenty of crisis-fighting progress, echoing comments from other European officials who said there should be greater attention paid to U.S. fiscal troubles and emerging economies slackening growth.
He criticized Lagarde for calling for flexibility even before the "troika" of Athens's lenders -- the IMF, the European Union and the European Central Bank -- complete a review of their 130 billion euro bailout program for Greece.
"Until we have the troika report, we must not speculate," he said.
Lagarde and Schaeuble shared the stage as part of a panel discussion, their first public joint appearance since the IMF head surprised investors on Thursday by stating unequivocally that Greece and Spain needed more time.
Spain's economy minister, Luis de Guindos, said there was "absolutely" no political resistance from within the euro zone to a Spanish bailout request, an apparent reference to Germany. Spain is under pressure to seek a bailout as it struggles to rein in central government spending but Germany has sent strong signals it should hold off.
EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview that Spain could get a precautionary credit line from the euro zone's permanent bailout fund with the possibility of buying Spanish bonds at primary auctions, if Madrid decided to ask for financial help.
U.S. officials have expressed support for giving European countries extra time to deal with their debt.
In Lisbon, Portugal's Prime Minister Pedro Passos Coelho said his country was adjusting austerity measures to reality so it would not have to request more rescue funds.
But Italy's economy minister, Vittorio Grilli, said in Tokyo the economic pain from fiscal consolidation was "a necessary price to have for a much brighter future in the medium and long term."
Even as the euro zone debt crisis rages, the European Union was awarded the Nobel Peace Prize.
"Despite some gloom in the economy in Europe, still this is a great day for Europe," Rehn said.
CHANGE OF TUNE
The IMF's change of tune on the speed of budget cuts stems from research it released this week showing that aggressive fiscal consolidation crimps growth more sharply than previously thought.
It also reflects a desire by Lagarde, a former French finance minister, to demonstrate the IMF is willing to get tough with Europe. Big emerging economies, who have helped top up the IMF's crisis-fighting coffers, had worried about the Fund's independence.
"Let us not delude ourselves: without growth, the future of the global economy is in jeopardy," she said.
"One lesson is clear from history: reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth," she said.
Nobel prize-winning economist Paul Krugman called the IMF's new research, contained in its latest World Economic Outlook, "an extensively documented exercise in hand-wringing."
"Kudos to the Fund for having the courage to say this, which means bucking some powerful players as well as admitting that its own analysis was flawed," Krugman wrote on his blog.
While the IMF has advocated a slower approach to debt reduction, it urged swifter policy action, both in Europe and the United States, to remove economic uncertainty and help lift anemic global economic growth.
In Europe, the IMF wants to see more progress toward promised reforms that would create a tighter fiscal and banking union.
In the United States, the IMF has sounded the alarm over the "fiscal cliff" of automatic spending cuts and tax increases that take effect early next year unless Congress acts. Without action, the tightening could plunge the economy back into recession, the IMF said.
ECB's Coeure said that unlike in April, when the IMF held its spring meetings, Europe was no longer the only risk to the global economy and the United States and Asia both held potential peril.
"The discussions on tail risks in the global economy do not focus entirely on Europe anymore," he said.
The Fund lowered its global growth forecast this week for the second time since April. Host Japan offered another reminder on Friday that its own economy was losing steam as the government downgraded its forecast for a third straight month.
But many officials pointed out that the global economy is still growing, and expressed confidence that Europe would find a way out of its mess.
"In Europe, the decision-making process is slow and cumbersome. But it's always delivered in the end," Portugal's Finance Minister Vitor Gaspar said.
(Reporting by Reuters IMF team; Writing by Emily Kaiser; Editing by Tim Ahmann and Neil Fullick)