IMF and the Greek tragedy
IMF and the Greek tragedy
10/07/2013 - 10:51am
Three years since its first bailout, the IMF has finally had the courage to admit that it made major mistakes in its handling of the Greek debt crisis and its failure to realize the damage austerity would cause. It is obvious that it has underestimated the negative effects of austerity on growth and therefore ended up making economic forecasts that were much too optimistic about Greece’s economic recovery and debt sustainability. While the IMF predicted a contraction of 5.5% of economic output between 2009 and 2012, the Greek economy actually lost 17%, and where the IMF predicted 15% unemployment by 2012, the actual rate reached 25%.
The Greek Labour Institute and the think tank IOVE made forecasts that were much closer to the actual outcome than the IMF was. The IMF now argues that Greece should have had debt cancellation as early as 2010, but claims that this policy response was politically unpalatable to those countries, i.e. Germany, France and the Netherlands, whose banks had a large exposure to Greek debt.
The IMF report admits to three major failings of the Greek programme.
First, that Greek sovereign debt wasn’t restructured immediately and a haircut on government bonds held by private investors was delayed until March 2012.
Second, the IMF admits that the underlying macroeconomic assumptions used in its debt sustainability analysis, were wildly optimistic. As the IMF has previously conceded, it underestimated the fiscal multiplier and therefore the impact of austerity and budget cuts on economic growth. With growth estimates way off, deficit and debt-to-GDP ratios were wrong as well. The much sharper than forecast contraction meant that unemployment also soared well beyond the IMF’s expectations. The results are easily seen: Greece is still in deep recession and experiences general unemployment close to 27 percent, with nearly two-thirds of under-25s out of work. In the meantime, incomes have plunged by about one third since 2009.
Third, the IMF said that the Troika might not work like a “well-oiled machine.” The report highlights indeed the extreme difficulty of working together with so many diverging and sometimes conflicting interests in the euro area, the European Commission, the ECB and individual creditors as dynamic as Germany, especially- I would add- at times of elections with Mrs Merkel very determined to win.
Over the past thirty years, the world has experienced over a hundred financial crises, in various countries, with the IMF responding to practically every single one of them, with the same obsolete policy prescription of rapid fiscal contraction, fire sale privatizations and far-reaching neoliberal market reforms.
Mr Jean-Claude Juncker, Former Eurogroup president, who played a central role in the 2010 bailout out had foreseen that the European Union and the IMF were "overly optimistic" in the early stages of the bailout process, long before the IMF admitted so.
It is however of little consolation to the Greeks, if Mr Junker or the IMF acknowledged afterwards that they underestimated the damage to Greece’s economy, caused by the bailout program and the spending cuts or tax hikes it envisages.
The facts show that the Greek bailout was based on unrealistic assumptions. It assumed impeccable implementation of ambitious structural reforms, all at enormous cost to the Greek people. And even then, it was inconsistent with the IMF's rules for exceptional access to the Fund's resources. The programme design was heavily influenced by what was acceptable to the euro area. A less aggressive pace of adjustment, based on more realistic assumptions, would have required additional financing. But as the report notes, additional financing was 'politically difficult'.
As a result, Greece was given a program that was destined to fail. The program was perhaps necessary for the good of the euro, but definitely not good for the people of Greece. Greece deserves a more generous treatment by both the IMF and the eurozone.
The problem unfortunately persists. The IMF and the eurozone do not seem to learn from their mistakes. Their decisions regarding the Cyprus crisis – including a haircut of bank deposits and the same austerity recipes followed in Greece – are leading yet another country towards economic disaster and deep social crisis. Austerity doesn’t work. It’s about time to admit it, to stop experimenting with people’s lives and change direction. EUROPE ON LINE
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