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IMF Miscalculated Greek Austerity Effect

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IMF Chief Economist Olivier Blanchard

IMF Chief Economist Olivier Blanchard

The top economist at the International Monetary Fund (IMF) one of Greece’s Troika of lender, has admitted that the agency didn’t calculate how devastating the austerity measures it wanted would be on the Greek economy and those of other struggling European countries.

The IMF, along with the European Union and European Central Bank, are putting up $325 billion in two bailouts to keep the Greek economy from collapsing, but the deep pay cuts, tax hikes and slashed pensions it insisted upon cut so much into revenues and limited growth that it skewed how long a recovery would take, Olivier Blanchard said in a report, according to the Washington Post.

The new and technical paper looks again at the issue of fiscal multipliers — the impact that a rise or fall in government spending or tax collection has on a country’s economic output. The paper reflects his view and not that of the agency, it was cautioned.

The Post explained that if fiscal multipliers are small, countries can cut spending faster or raise more in taxes without much short-term damage. If they are large, then the process can become self-defeating, at least in the short run, with each dollar of government spending cuts costing the economy more than a dollar in lost output and, thus, increasing ratios of debt to gross domestic product.

That is what has been happening with a vengeance in Greece, where fund forecasters in 2010 predicted that the nation could cut deeply into government spending and quickly bounce back to economic growth and rising employment. Two years later, the Greek economy is still shrinking, and unemployment is at 25 percent.

Simply put, Greece was losing revenues almost as fast as it was cutting how much it spent, negating the expected effects of austerity in a vicious self-defeating cycle. More than 68,000 Greek businesses have closed since 2010 and despite the failure of austerity, Prime Minister Antonis Samaras’ uneasy coalition government is about to impose another $17.45 billion in spending cuts and tax hikes that are expected to further worsen a deep recession now in its sixth year.

“Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,” Blanchard and his co-author, IMF economist Daniel Leigh, wrote in the paper. The Post added that the IMF fund has been accused of intentionally underestimating the effects of austerity in Greece to make its programs acceptable, although Greeks have responded with a barrage of protests, strikes and riots that brought down the previous government led by PASOK Socialist leader George Papandreou.

IMF officials said that it was European leaders – especially German Chancellor Angela Merkel – who insisted on keeping Greece’s feet in the fire, a stance many Greeks believe was punitive. Despite her intransigence, Samaras invited her to Athens in October, 2011, triggering widespread protests, and is set to go to Berlin next week to give her a report on the progress of government reforms.

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  • Alex

    “IMF Miscalculated Greek Austerity Effect”

    This is a manipulative title just intended to push Andy’s politics. (stating the opinions of one man as if its a “fact”)

    Austerity was necessary Period.  We could not continue to spend money that was not ours. Anyone that claims otherwise is an incompetent populist offering empty promises. (see communists like Syriza)

  • Yiannis

    Too bad the US doesn’t want to admit to itself that it will be the next Greece.
    Why not the medicine now as Latvia did and reemerge strong, then again Greece and US are not used to hardship.

  • http://www.facebook.com/profile.php?id=506424224 Peter Zorbas

    Although true, this article needs to give breadth in how a weak economy in comparison to EU sister nations can help benefit a weaker EU economy.  For instance, the well-educated youth of Greece and the weak economy, can attract a tech/manufacturing industry that can really balance the future for all Greeks.  Stamping out all government corruption and a disinterested society that fails to contribute their part into a civil effort, will solidify their position more.

    This is how China did it – through a nation-wide reinvention because of their culture revolution.  Cheap plentiful labour fueled its growth decades later, where a prevalent middle class exists today.  They are on track — if not already there — to have the world’s most advance technology, and labour workers.  They can be considered the world’s super power because of the far reach their economical power yields in every other country.

    Not to say that Greece will become what China is by any means, but it will hopefully morph itself into a legitimate, efficient, market where the public does its duty in securing an honest government with tangible goals for the country.

    Definitely possible, but requires the corrupt public/government officials to have their minds reformatted.

  • The maverik

    Peter your comment have no substance in Greece unless as you said stamping out all government corruption…If we do just that and resurrect the justice system, than we will be able to prosper like any other European country but until then, Greece will depend on handouts from the world…

  • http://www.facebook.com/nancy.elwell.7 Nancy Elwell

    Love observations like these from the wealthy bureaucratic who’ve never ever spent a day tying to figure out where theri next meals will come from. Same in the good ole US ofA

  • Asdfgh

     It’s the people from the 90s and after untill 2010 or so that were not used to hardships.
    People of older generations are very well used to hardships (World Wars,civil wars,etc).
    Even so,endurance does have a limit.Moreso if you are promised certain things but ned up betrayed….

  • http://www.facebook.com/profile.php?id=506424224 Peter Zorbas

    I agree Maverik, a lot needs to be done.  The reason would definitely not be because of an under educated youth.  Building trust in commerce is key in doing business with other nations.  The tools and perhaps the infrastructure is already there.  I live in Toronto and let me tell you how much more advanced the Athenian public transit system is than Toronto’s.  Pulling for the honest, hard-working Greeks to succeed.  Shame that a rare few can cause such an endemic.

  • dangler69

    As usual the spin doctors of the IMF think they can fix Greece or anyone for that matter by waving their magic wand. First off the corrupt ruling class did not implement any of the market reforms that were supposed to spur growth. Neither did they crack down on tax evasion, mostly because they’re involved with the biggest offenders. Of course austerity alone will fail but it’s not the culprit.

    That said, we are in much more worse shape here in the US. Our income to expense ratio is out of control and the debt is ballooning. We are by all measures much worse than Greece, taking in 2.2 trillion and spending 3.5, every year. It won’t be long before our GDP/debt ratio is worse than Greece’s. Our politicians simply care about one thing… Getting re-elected, and running unsustainable debt will not stand in their way. I have no idea who will bail us out…..

  • Yiannis

    I for one will not apologize for seeing the handwriting on the wall, moving to the US, working hard and “making’ it, all without graft or fakelaki and not waiting for government handouts. I still remember the harsh Greek yrs of the 70′s when we couldn’t even afford a TV.
    Like Asdfgh said, after the easy money 90′s and 2000′s most have forgotten what hardship is.

  • Yiannis

     The Chinese for now by continuing to buy our debt but for how much longer?

  • dangler69

    US debt is considered a safe heaven cause of the Bond Rating. Not sure what the Chinese will do with it once we default.

    There is a bonehead of an idea to deal with the budget deficit and that is to mint a trillion dollar platinum coin. Short term nonsense of course, but we have short term thinkers in DC anyway.

  • worldarts

    I just read in today’s Greek Press that most all Politial Parties actually voted in 2009 to have the State give them more Free funds, and even “tainted PASOK” party who came away with the “Mother Load” of free money which is 3.1 million euros! New Democracy, the leader of today’s tripartite coalition government, will be getting 2.43 million euros, while Main opposition SYRIZA is only to get 556,005 euros. What a joke and FRAUD! —— The First thing Greece needs to do is get rid of both the PASOK and New Democracy criminals who have monopolized power and brought the country to it’s knees after 37 years of ruling back and forth. Then you need to ask why the Justice system isn’t working, why it’s only for the
    elites…

    ***Why has Mr. Venizelos not been prosecuted for crimes against the State and Greek People for hiding the “Legarde List” for 2 years in his home?
    ***Why was Mr. Papaconstantinou, Venizelos partner in crime and George Papandeaou allowed to flee Greece with investigations going on? Why hasn’t Investigator Peponis reached his conclusion yet?
    ***Why is Akis Tszazopoluos still waiting for his trial after all this time?
    ***Why is Mermerakis still Speaker of Parliament after his crimes at Proton Bank?
    ***Why was Mr. Chistoforakos of the Siemen’s Scandal allowed to flee to Germany?

    WHERE IS THE GREEK PRESS INVESTIGATING ALL THESE CRIMES????

    Until someone starts righting the wrongs of the inept Justice System here– Greece will repeat the same mistakes and the bailouts will end in failure, sparking an eventual Revolt when the people have had enough of lies and crimes from their horrific immoral Leaders.

  • worldarts

    I just read in today’s Greek News that most all Politial Parties actually had
    voted in 2009 to to have the State give them more funds, and even PASOK who came
    away with the “Mother Load” of free money which is 3.1 million euros! New
    Democracy, the leader of today’s tripartite coalition government, will be
    getting 2.43 million euros, while Main opposition SYRIZA is only to get 556,005
    euros. What a joke and FRAUD! —— The First thing Greece needs to do is get
    rid of both the PASOK and New Democracy criminals who have monopolized power and
    brought the country to it’s knees after 37 years of ruling back and forth. Then
    you need to ask why the Justice system isn’t working, why it’s only for the
    elites…

    ***Why has Mr. Venizelos not been prosecuted for crimes
    against the State and Greek People for hiding the “Legarde List” for 2 years in
    his home?
    ***Why was Mr. Papaconstantinou, Venizelos partner in crime and
    George Papandeaou allowed to flee Greece with investigations going on? Why
    hasn’t Investigator Peponis reached his conclusion yet?
    ***Why is Akis
    Tszazopoluos still waiting for his trial after all this time?
    ***Why is
    Mermirakis still Speaker of Parliament after his crimes at Proton
    Bank?
    ***Why was Mr. Chistoforakos of the Siemen’s Scandal allowed to flee to
    Germany?

    WHERE IS THE GREEK PRESS INVESTIGATING ALL THESE
    CRIMES????

    Until someone starts righting the wrongs of the inept Justice
    System here– Greece will repeat the same mistakes and the bailouts will end in
    failure, sparking an eventual Revolt when the people have had enough of lies and
    crimes from their horrible Leaders.

  • Four Eyes

    Oh no. It’s ok. Samaras will make sure he will take your mind of this corruption by concentrating on Republic of Macedonia. It’s like they stole your money!

    Lol

    Idiots!

  • worldarts

    Why isn’t the IMF and EU Commission and Greek Press asking WHY Greek Parliamentarians and minister are still immune from prosecution after the “Legarde List” Fiasco? Are they brain dead? No, they simply work only with PASOK & ND and could care less about the Greek People suffering horrific austerity !

    Unbelievable how the Greek Press are complicit in the ruination of their own country!

    MOST of the blame for Greece and its Politician’s blatant corruption falls upon our muted Press and TV Media — who appears to be doing little or saying almost nothing about the criminal practices of the elites and MPs in Parliament (“Vouli”). One wonders why they are afraid to speak up? — There is absolutely no sign of any serious “investigative journalism” here, exposing or digging into the REAL Government Criminals and their illegal machinations.

  • Yiannis

    Are we surprised  that the government is using any distraction possible to stall instead of going after the tax cheats? We made the New York Times again…embarrassing. http://www.nytimes.com/2013/01/06/world/europe/greece-tax-scandal-shifts-focus-from-collection-problem.html?emc=tnt&tntemail1=y&_r=0

  • Alex

    Your claims are exaggerations. There have been massive cuts in government spending and all sorts of legislative change.  Tax evasion is still a problem but it is not limited to government ties as you absurdly try to insinuate.

  • Alex

    Pasok is a LEFTIST party just like LEFTIST Syriza no? 

    I am Greek and I fear your “cure” (far leftist extremists) more than the disease.

  • Alex

    Have to kove how you say “republic of Macedonia” troll rather than “Former Yugoslavia”.  Clearly you are a “friend” of Greeks that “cares” deeply for our welfare.

    Can you remind us again what the US, UK and other western governments that militarily supported us against IMRO  meant when it used to say…

    “This (US)
    Government considers talk of Macedonian “nation”, Macedonian
    “Fatherland”, or Macedonia “national consciousness” to be
    unjustified demagoguery representing no ethnic nor political reality, and sees
    in its present revival a possible cloak for aggressive intentions against
    Greece” – US State Department Dec, 1944 (Foreign Relations Vol. VIII
    Washington D.C. Circular Airgram – 868.014/26)

  • Alex

    And why are fanatics like you supporting COMMUNISTS????

  • dangler69

    Such passion! OK tell me then… Is the pharmacist profession free now? How about taxis? Tanker trucks? What professions are now open to the free market and not subject to nanny state rules? Have you tried to open a business in Greece and what about the red tape? Is it less before?
    Have those bogus organizations employing a bunch of useless people closed? How many public servants have been laid off?
    I have the answers to all of the above 0
    To have passion and opinion is good, to have it based on real evidence is much better.

  • gilcancun

    This means I get to continue with my recommendations on how to solve the problems in Greece, but I must remind one and all that I am not Greek in any sense but I do love the country and its people. Almost all of them.
    1.) The politicians who caused the crisis, including Papaconstaninos, should be locked up on a maximun security prison and the key thrown into the Aegean Sea.
    2.) We should all stop calling PASOK a socialist party because it is in actual fact a band of thieves and liars. Real socialists don’t steal tax money and don’t write false reports to Brusselles.
    3.) There are a thousand reasons why Greece should revert to using the Drachma as legal tender. But the one that has me convinced is that the banknotes were a lot prettier than the euro.
    4.) what the European Union is doing is punishing the Greek people for the fraud committed not by them but by their politicians (think Papandreas, Venizelos, etc.).
    5.) When the aforementioned fraud was being perpetrated, the European Union was perfectly aware of it. I heard it discussed on Deutche Welle television while the politicians were laughing up their sleeves.

  • The Greek

    Greece needs to kick start it economy by lowering the company tax rate and linking it to employment.It needs to match Bulagias and the laws regarding tax collection need to change..

  • worldarts

    Mr. Barroso himself was an extremist hard line member of a “Maoist”
    Communist party in Portugal before becoming President of the EU, so what
    does that tell you? Doesn’t Mr. Tripras of SYRIZA deserve the same
    chance Barroso was given?