Lagarde urges flexibility on fiscal targets

A day after elections in France and Greece delivered to power parties opposed to severe government cutbacks, Lagarde said countries should not be forced to tighten spending if unexpectedly slow growth erodes already-troubled budgets.

"Countries need to keep a steady hand on the wheel," she said in a speech in Zurich, according to the text of her remarks.

"If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets. In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens."

The issue is crucial a number of eurozone countries facing recession, including three under IMF-EU bailouts; Portugal, Greece and Ireland.

All have agreed to the March EU compact that includes tough budgetary targets, and the three also face fiscal performance goals under their rescues that have contributed to crunching growth.

Lagarde, who did not mention specific countries in her speech, played down the choice between austerity and growth.

"The growth camp says that we need more government stimulus to increase growth. The austerity camp says that markets are sitting in judgment over a mountain of public debt, and governments need to do what is necessary to reduce that debt as fast as possible," she said.

"I believe it is a false debate... We can design a strategy that is good for today and good for tomorrow. Good for stability and good for growth -- where stability is conducive to growth and growth facilitates stability."

She added that monetary policy has already been eased with the aim of increasing demand and returning to economic growth.

While monetary policy is already extremely loose, there might be some scope -- and need -- to go faster in some cases," she said, without being specific on where and how.