If your patience with the euro-shambles over Greece is wearing thin, I understand. Nonetheless, I want to draw your attention to two new articles on the subject. They’re brief and well worth your time. The first tells you all you need to know about how Europe got to this point. The second tells you all you need to know about what ought to happen next.
If you’ve followed the story so far, of course, you know that what ought to happen next won’t happen.
Karl Whelan, a professor of economics at University College Dublin, crisply explains why it’s wrong to blame Greek Prime Minister Alexis Tsipras and Syriza for the mess. They didn’t preside over Greece’s borrowing binge — or, to put it another way, Europe’s lending binge. And by the time they came on the scene, gross and repeated errors of judgment by European Union finance ministers, the European Central Bank and the International Monetary Fund had wrecked the Greek economy.
Europe’s leaders wouldn’t let Greece default on its private debts when letting that happen (in 2010) would have made sense, and when the harm would have been small. Instead, they lent to Greece, with conditions, so that banks in the rest of Europe could be paid back for another two years. The result was to flatten the Greek economy while greatly increasing its debt burden. In due course, the crippling of the economy under the creditors’ direction brought Tsipras and Syriza to power.
Far from acknowledging their errors, much less learning from them, the creditor institutions are content to roll their eyes at Greek recidivism. IMF Managing Director Christine Lagarde has the nerve to call for “adults in the room,” as though she finds this all rather trying and her patience is finally wearing thin. As Whelan fairly observes:
“(S)he seems to have forgotten that the IMF were supposed to be the adults in the room for discussions on Greece from 2010 onwards. But rather than adopt an approach consistent with their usual policies, the European-led IMF decided that European countries deserved the opportunity to be saddled with particularly high burdens of debt to the official sector.
“Europe, it turns out, has gained very little from European influence at the top of the IMF. The rest of the world should learn from the Greek fiasco that former European politicians can no longer be trusted with the leadership of this crucial institution.”
The second article is by Ashoka Mody, a visiting professor at Princeton and a former senior official at the IMF. In a piece for Bloomberg View, Mody explained what the fund did wrong. In a new piece for VoxEU, he sets out the program for Greece that the creditors should deduce from the IMF’s own research on economic stabilization.
Mody’s suggested program has three elements. One: Write the debts down to 50 percent of gross domestic product, payable over 40 years. Two: Shrink and restructure the domestic banking system. Three: Run a small primary budget surplus of 0.5 percent over the next three years.
These recommendations, he explains, follow from the widely-cited findings of the IMF’s own research department. A 2013 paper examines the 2010 program and, stripped of euphemisms and translated into plain English, declares it a failure: Adjustment programs need to reduce debt, and this one didn’t.
Discussing this, Mody emphasizes a point that’s often ignored: “Some might say that Greece does not have a debt overhang. With the ultra-low interest rates on its official debt, Greece, it is argued, can repay its debt without sacrificing growth and reasonable social objectives. But even under the troika’s calculations, the conclusion that Greece can comfortably pay back its debts is true only on the assumption that Greece will increase its primary surpluses. The troika’s demands earlier this year were for an extraordinary ramp up in primary surpluses — from a small negative number to over 4 percent of GDP.”
This brings us to a different IMF study, also widely cited: It finds that fiscal austerity in a flattened economy is self- defeating. Yet another piece of IMF research shows that structural economic reforms, however desirable they might be in the long run, don’t improve the fiscal position in the short term; and during a recession, in fact, they may make things worse. As you’d therefore expect, in the talks with Greece, the IMF has led the creditors in insisting on further austerity and structural reforms.
It’s certainly possible that all these findings are wrong. The point is, they’re the IMF’s own findings. The IMF is a member of the troika in the first place because of its supposed expertise in these matters. To the best of its knowledge, the fund’s own policy on Greece is wrong.
The widening gap inside the IMF between its negotiators and economists would be no more than an entertaining sub-plot in the unfolding Greek fiasco, were it not for the damage that the creditors have already done — and the further damage they seem intent on causing before this is over.
Tsipras is a menace, no doubt. But he’s only just getting started. On a conservative estimate, the creditors have been proudly screwing things up for five years.
Clive Crook is a Bloomberg View columnist and a member of the Bloomberg View editorial board.
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