A Greek tragedy of the IMF's making
James Galbraith says thanks to the policies imposed on it, Greece's post-2010 adjustments have led to economic ruin rather than growth
The International Monetary Fund's chief economist, Olivier Blanchard, recently asked an important question: "How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?" But that raises two more questions: How much of an adjustment has Greece already made? And have its creditors given anything at all?
In May 2010, the Greek government agreed to a fiscal adjustment equal to 16 per cent of gross domestic product from 2010 to 2013. As a result, Greece moved from a primary budget deficit to a primary balance last year - by far the largest such reversal in post-crisis Europe.
The IMF initially projected that Greece's real GDP would contract by around 5 per cent over the 2010-2011 period, stabilise in 2012, and grow thereafter. In fact, real GDP fell 25 per cent, and did not recover. And, the debt/GDP ratio continues to rise.
Blanchard notes that in 2012, Greece agreed to implement "a number of reforms which should lead to higher growth". Those so-called reforms included sharply lower public spending, minimum-wage reductions, fire-sale privatisations, an end to collective bargaining, and deep pension cuts. Greece followed through, but the depression continued. Indeed, Greece's post-2010 adjustment led to economic disaster.
Blanchard should know better than to persist with this fiasco. With no path to growth, the creditors' demand for an eventual 3.5 per cent-of-GDP primary surplus is actually a call for more contraction. But, rather than recognising this reality, Blanchard doubles down on pensions, insisting that "a reduction of pension expenditures of 1 per cent of GDP is needed" and "can be done while protecting the poorest pensioners".
Note first his damning admission that apart from pensions and wages, spending has already been "cut to the bone". And remember: the effect of this approach on growth was negative. So, in defiance of overwhelming evidence, the IMF now wants to target the remaining sector, pensions, where massive cuts have already been made.
Every debt crisis, sooner or later, ends in restructuring or default. In fact, Greece has a credible proposal, in which it does not ask for one cent of additional official funding for the state. It is promising to live within its means, and rely on internal savings and external investment for growth.
Blanchard insists now is the time for "tough choices, and tough commitments to be made on both sides". Indeed it is. But the Greeks have already made tough choices. Now it is the IMF's turn, beginning with the decision to admit that the policies it has imposed for five long years created a disaster.
James K. Galbraith is a professor at the Lyndon B. Johnson School of Public Affairs, University of Texas. Copyright: Project Syndicate