IMF: Sorry Greece, Ireland, Portugal we were wrong!

Sorry Greece, Ireland and Portugal says now the International Monetary Fund, we have grossly underestimated the negative effect on your economies, from our draconian austerity policies we recommended two years ago. This unbelievably blatant recognition, that the Fund, together with the EU Commission and the European Central Bank are applying wrong policies to the over-borrowed Eurozone countries, comes from the most competent source, the chief economist of the Fund and his deputy, Olivier Blanchard and Daniel Leigh. The official authorisation from the IMF to distribute the report of the two authors came on 3 January 2013.Of course this confession is not officially recognised by the IMF. As the Fund comments, “the views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.” Still those two guys are the brains behind IMF’s policies, which have sent half of Eurozone’s countries to an unseen before peace-time recession. Greece, Ireland, Portugal and soon to come to the club Spain and Italy are still under this wrong IMF recipe, which has being conclusively adopted by the European Commission, the European Central Bank and Berlin. At this point it must be reminded what was the cost to Greece from the policies the country was forced to apply by this troika of IMF, EU Commission and ECB. The Sting recently wrote on this respect: “All along the last two and a half years Greece is under the “protection” of the troika of International Monetary Fund, the European Central Bank and the European Commission. Those three institutions theoretically are taking care of Greece’s financial problems, offer more loans and also dictate to the country’s government an economic policy mix of their choice including mainly draconian expenditure cuts. In this way ironically they managed to increase the country’s debt from 115% of the GDP in 2009, to 160% in November 2012. The reason was that the over the same period, Greece helped by troika, lost one-quarter of its Gross Domestic Product. This is by far the largest ever recorded loss of income and product in a developed economy in peacetime”. In the case of Ireland and Portugal, the other two Eurozone countries which have being following similar programmes conceived by the troika, the negative effects were not that deeply devastating as in Greece, because those two countries apply a bit less tough austerity measures. The idea behind those programmes is to turn government budget deficits into surpluses in a very brief period of time. The first recognition that the programmes were all wrong came last September, with the acceptance that the three countries need two more years to accomplish the draconian austerity targets set by the troika.  This was the direct outcome of the first hints by the IMF chief economist that the programmes are wrong, a confession made in Tokyo this summer by the writers of the report, during the annual conference of IMF and the Word Bank. The confession The two writers courageously recognise that they made mistakes. As they put it: “This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis”. In plain English the IMF says that they had grossly underestimated the negative effect of tough austerity and cuts of public spending on the economy. Reality showed that a larger than expected multiplier effect led to too much bigger losses of incomes and production in the three programme countries, as a result of the enforced by the IMF cuts in public spending. Seemingly the Fund economists became conscious this summer of the huge extend of the damage and insisted that the other two members of the troika, namely EU Commission and ECB, also relax their demands from the three countries. The last to change attitude was Berlin, under heavy pressure from the IMF. In any case Eurozone still follows the same recipe vis-à-vis the Eurozone countries needing financial support but the time horizon of the programmes to achieve fiscal consolidation have been extended by two years.