The IMF is now in the most unenviable of positions with respect to
its involvement with the Greek economy. It is deeply reviled by the
Greek population for its role in having wrecked the Greek economy and
for now insisting on further painful economic structural reforms. It is
also deeply resented by Greece’s European partners for its insistence
that they must substantially write down their Greek debt claims if the
IMF is to be involved in any future Greek economic support program.
There can be no question that the IMF’s role in the Greek economy over the past seven years has been extremely costly both for Greece and for the IMF itself. By insisting on excessive fiscal austerity in a Euro straitjacket, the IMF must bear its share of responsibility for Greece’s economy succumbing to a depression that in its severity now exceeds that of the United States during the 1930s. It must also bear its share of responsibility for the consequent fragmentation of Greek politics and for the surge of populism in that country.
At the same time, by supporting economic programs that failed spectacularly, the IMF has done enormous damage to its credibility as a purveyor of sound and impartial economic advice. In so doing, it has seriously undermined its political acceptability in helping to resolve future economic crises in individual European countries.
To its credit, however, unlike either the European Commission or the
European Central Bank, the IMF seems to have learnt from its past policy
mistakes. It now recognizes the destructiveness of insisting on
excessive budget austerity in a Euro straitjacket. It also recognizes
how counterproductive it is to delay debt restructuring when a country’s
public debt is on a clearly unsustainable path. One has to lament that
the IMF did not recognize these points in early 2010 when it designed
the first Greek bailout program.
The belated recognition of its past policy mistakes has now brought the IMF around to a very much more reasonable position than that of its former troika partners. The IMF is now correctly insisting that a 3 ½ percent of GDP primary budget surplus, as being demanded by Greece’s European partners, would be both unsustainable on a long-term basis and would involve excessive budget tightening in the short-term. It is also correctly arguing that absent substantive debt restructuring, Greece’s debt to GDP ratio is well on the way to approaching 300 percent over the longer term.
The IMF would also seem to be right in arguing that a necessary condition for putting Greece’s economy back on a sustainable growth path would be the successful implementation of far-reaching tax and pension reform measures. However, especially in light of southern Europe’s very poor economic growth experience over the past decade, there is good reason to be skeptical that even with sound structural reform measures, the Greek economy could deliver rapid growth while it remains stuck in a Euro straitjacket.
It will be all too tempting for Greece and its European partners to ignore the IMF’s current economic policy recommendations and to go ahead with a program without IMF participation. After all, the IMF is little loved in Europe and it hardly covered itself in glory with its past policy recommendations.
However, to now go ahead with an economic adjustment program in disregard of the IMF’s advice and participation would be a grave mistake. It would demonstrate that neither Greece nor its European partners had learnt anything from Greece’s past dismal economic performance. More to the point, it would all too likely condemn Greece to yet many more years of economic misery without any prospect of real economic recovery.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
There can be no question that the IMF’s role in the Greek economy over the past seven years has been extremely costly both for Greece and for the IMF itself. By insisting on excessive fiscal austerity in a Euro straitjacket, the IMF must bear its share of responsibility for Greece’s economy succumbing to a depression that in its severity now exceeds that of the United States during the 1930s. It must also bear its share of responsibility for the consequent fragmentation of Greek politics and for the surge of populism in that country.
At the same time, by supporting economic programs that failed spectacularly, the IMF has done enormous damage to its credibility as a purveyor of sound and impartial economic advice. In so doing, it has seriously undermined its political acceptability in helping to resolve future economic crises in individual European countries.
Christine
Lagarde, Managing Director, International Monetary Fund (IMF) attends
the annual meeting of the World Economic Forum (WEF) in Davos,
Switzerland January 18, 2017. REUTERS/Ruben Sprich
The belated recognition of its past policy mistakes has now brought the IMF around to a very much more reasonable position than that of its former troika partners. The IMF is now correctly insisting that a 3 ½ percent of GDP primary budget surplus, as being demanded by Greece’s European partners, would be both unsustainable on a long-term basis and would involve excessive budget tightening in the short-term. It is also correctly arguing that absent substantive debt restructuring, Greece’s debt to GDP ratio is well on the way to approaching 300 percent over the longer term.
The IMF would also seem to be right in arguing that a necessary condition for putting Greece’s economy back on a sustainable growth path would be the successful implementation of far-reaching tax and pension reform measures. However, especially in light of southern Europe’s very poor economic growth experience over the past decade, there is good reason to be skeptical that even with sound structural reform measures, the Greek economy could deliver rapid growth while it remains stuck in a Euro straitjacket.
It will be all too tempting for Greece and its European partners to ignore the IMF’s current economic policy recommendations and to go ahead with a program without IMF participation. After all, the IMF is little loved in Europe and it hardly covered itself in glory with its past policy recommendations.
However, to now go ahead with an economic adjustment program in disregard of the IMF’s advice and participation would be a grave mistake. It would demonstrate that neither Greece nor its European partners had learnt anything from Greece’s past dismal economic performance. More to the point, it would all too likely condemn Greece to yet many more years of economic misery without any prospect of real economic recovery.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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