The IMF on Thursday backed giving debt-burdened Greece and Spain more time to reduce their budget deficits, cautioning that cutting too far, too fast would do more harm than good.
But Germany pushed back and said back-tracking on debt-reduction goals would only hurt confidence, a stance that suggested some disagreement between the International Monetary Fund and Europe's largest creditor country.
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"The IMF has time and again said that high public debt poses a problem," German Finance Minister Wolfgang Schaeuble told reporters. "So when there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction."
"When you want to climb a big mountain and you start climbing down then the mountain will get even higher."
The IMF released new research this week showing that fiscal consolidation has a much sharper negative effect on growth than previously thought. Since the global financial crisis, these so-called fiscal multipliers have been as much as three times larger than they were before 2009, the IMF research shows.
That means aggressive austerity measures may inflict deep economic wounds that make it harder for an economy to get out from under heavy debt burdens.
"It is sometimes better to have a bit more time," IMF Managing Director Christine Lagarde said. "That is what we advocated for Portugal; this is what we advocated for Spain; and this is what we are advocating for Greece."
But the IMF was less willing to be patient with Europe on following through with its efforts to seek a more cohesive fiscal and banking union. It said that process was critically incomplete, and blamed the plodding pace for contributing to economic uncertainty that was hurting global growth.
Emerging markets expressed frustration that the euro zone troubles were spilling into their economies. The IMF still expects emerging markets to grow four times as fast as advanced economies, but it cut its forecast sharply for two of the biggest players, Brazil and India.
"Europe has to get its act together," said Palaniappan Chidambaram, India's finance minister, speaking on behalf of the Group of 24 developing and emerging economies. "What is happening in Europe is having an impact on developing countries."
The IMF has expressed frustration with Europe's piecemeal response to its debt crisis and warned that a recent respite in borrowing costs for debt-laden countries such as Spain may prove short-lived unless euro zone leaders come up with a comprehensive and credible plan.
In its financial stability report on Wednesday, the IMF said that without swift policy action, including the triggering of the European Central Bank's bond-buying program, the premium that investors demand to hold Spanish and Italian debt instead of safer German bonds would nearly double.
Standard & Poor's cut its rating on Spain on Wednesday to a level just above junk territory, and Moody's may soon follow.
The IMF has said it stands ready to support a European bailout for Spain, should Madrid ask. Reuters reported on October 1 that Spain was ready to seek help, but that Germany was blocking an aid request because it preferred to combine a Spanish rescue with additional assistance for other struggling countries such as Greece.
Jose Vinals, the head of the IMF's monetary and capital markets department, warned that countries must not withhold help if Spain were to ask the European Central Bank to buy its bonds under a new bailout program, known as OMT for Outright Monetary Transaction.
"If it were to be the case that they decide to activate this mechanism and they can submit to the proper degree of conditionality, it would be essential that the creditor countries do not negate this activation of the OMT for Spain or for any of the countries," Vinals told Reuters.
MIND THE FISCAL CLIFF
European officials were keen to ensure their region was not the sole topic of discussion in Tokyo, where finance officials from around the globe have gathered for the semiannual meetings of the IMF and World Bank.
Europe wants more attention placed on the difficulties Washington faces addressing its "fiscal cliff" of automatic spending cuts and tax increases that will take effect early next year unless the U.S. Congress acts.
U.S. Treasury Secretary Timothy Geithner said the United States had a window of opportunity after its November 6 presidential election to negotiate a debt reform framework.
Geithner said the magnitude of fiscal reforms that the United States needed to achieve debt sustainability was between 2 percent and 3 percent of gross domestic product, which he pointed out was "a modest challenge relative to what most countries around the world face on the fiscal side."
"Our belief is that we can use the period between the election and the end of the year to negotiate a framework of reforms that can be phased in over time," he said.
Finance ministers and central bankers from the Group of Seven industrial nations - the United States, Japan, Canada, Italy, Britain, Germany and France - huddled during the afternoon to discuss their challenges, but did not issue a statement outlining their views.
Japanese Finance Minister Koriki Jojima told reporters the G7 agreed the global recovery faced risks and that it had held in-depth discussions on monetary policy. But he declined to go into specifics.
An official from the finance ministry, who spoke on condition of anonymity, said Europe was not in the firing line at the G7 meeting. "It's not the case that the meeting was dominated by a sense of pessimism about Europe, or that there was a sense the region was not doing enough," the official said.
(Additional reporting by Reuters' IMF and World Bank reporting team; Writing by Emily Kaiser; Editing by Tim Ahmann and Neil Fullick)