IMF: Sorry Greece it was a mistake of 11% of your GDP

Two fateful people for Greece. International Monetary Fund's Managing Director, Christine Lagarde (L) meets with Dutch Minister of Finance and president of Eurogroup, Jeroen Dijsselbloem. (International Monetary Fund photographic library)

Two fateful people for Greece. International Monetary Fund’s Managing Director, Christine Lagarde (L) meets with Dutch Minister of Finance and president of Eurogroup, Jeroen Dijsselbloem. (International Monetary Fund photographic library)

IMF’s country report on Greece which was published yesterday, recognises that the Fund’s initial programme underestimated by almost 11% of GDP the impact of the draconian austerity measures imposed on the country. As a result recession proved much greater than expected reaching 22% of the GDP. The relevant part of the report says that, “Fiscal targets were relaxed only marginally in the face of weaker growth, effectively leading to additional, highly pro-cyclical tightening”.

This means that the troika of EC-ECB-IMF which is running the Greek economy for the past three years didn’t have the flexibility to correct the policy targets according to reality. Severe policy measures rigidly applied aiming at reducing fiscal deficits, had the inverse effect that is enhancing deficits further. The IMF report points out that “Consecutive packages of (austerity) measures amounted to around 7 percent of GDP. Under standard OECD multipliers, this would have reduced GDP growth by additional 4 percentage points (on top of the direct impact of expectations and the liquidity squeeze on the economy), but multipliers have likely increased when liquidity crunch associated with the confidence crisis affected access to credit for households and businesses alike”.

Multipliers of woes

In short this means that the measures applied to correct the fiscal gap amounting to 7% of the GDP were predicted to have an additional negative impact on GDP of 4%. As it turned out this prediction proved to be wrong by 11% and the final result was an overall GDP loss of 22%, with unemployment now reaching 27% and youth unemployment skyrocketing at 60%.

In conclusion the IMF report recognises that ,“recession proved to be much deeper than expected, and the social cost has been very high. While GDP was on track in 2010, a key assumption of the program—that, after two years, a recovery in investment would begin to more than offset the drag from fiscal tightening, paving the way for a gradual recovery in 2012—failed to materialize”. This is like the Fund apologising for making a mistake of around 11 percent of GDP losses and another 15 percent of job losses.

Of course there are excuses. According to the staff report, “Greece is adjusting mainly through recession, not through productivity-enhancing reforms. Beyond the labour market, broader structural reforms have fallen well short of the critical mass required to transform the investment climate and boost potential growth. With fiscal adjustment set to weigh on demand for several more years, growth must come from private investment and exports. Thus, restoring growth and reducing unacceptably high unemployment will require full and timely implementation of ambitious reforms that firmly puts to rest uncertainty about the authorities’ willingness to tackle vested interests”.

However which are those vested interests which obstruct growth? The head of the IMF mission to Greece, Poul Thomsen, explained that in an interview to the Fund’s Press office. Of course the questions asked by his colleague in the IMF were phrased to give him the opportunity to justify the unjustifiable and be self-congratulating. This is not only unethical but the ‘journalist’ who asked those ‘questions’ must be held accountable to his/hers professional body. When he was asked the…bone breaking question, “What else is needed to restore growth and also bringing back jobs?”, he replied that the pharmacists and the tourist guides are the main obstacles to growth!

Pharmacists and tourist guides

Here is what he said: “Thomsen: The big question is indeed, where growth will come from. This will require flexibility in the economy to be able to reallocate resources from low-productivity to high-productivity activities…There have been pervasive restrictions in professions, product markets and services markets, which have limited entry into various sectors and kept prices high. There are restrictions, for example, to become a tourist guide. Another example is that many over-the-counter products are allowed to be sold only in pharmacies where there is a guaranteed margin”. At this point it has to be noted that the ‘products’ Thomsen is referring to are medicines which are sold without a medical prescription.

Eurozone partners

Coming now to the role of Greece’s partners in the Eurozone and their role in reducing the country’s debt, the IMF is rather more realistic than while analysing its own blunders. The report states clearly that, “As far as European partners are concerned, it is critical that they dispel any doubts about their commitment to ensure debt sustainability (cut it down). The Eurogroup’s promise to provide additional relief to keep debt on the programmed path, if necessary and if primary balance targets are met, provides a welcome framework for restoring debt sustainability”.

Obviously both those conditions for Eurogroup partners to cut down Greece’s debt are clearly met. IMF says that the country is predicted to produce this year a primary surplus (without counting interest payments) in its fiscal accounts. As for the necessity of the haircut this is self-evident today. The IMF recognises clearly that the debt is unsustainable. Still Berlin, the largest sovereign creditor to Athens is looking the other way and nobody there speaks about a possible haircut on those debts. Only some vague references are aired over interest rate reductions. That is why the IMF exposes that bluntly Greece’s official creditors opportunistic attitude. IMF’s own loans to Greece are safeguarded from that because they are protected by the Fund’s statutes forbidding it.

All in all IMF’s stance towards Greece and the attitude of the country’s Eurozone partners is not at all reassuring. The country is pushed to add more jobless to today’s 1.5 million unemployed, by laying-off thousands of public workers.


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  1. john astrapos says:

    What about for 233 billion you have stolen all of you with the greek government from the money of greek people ?

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