The Schizophrenic IMF

 Last week the IMF published a “mea culpa” paper, outlining and confirming a lot of what a number of critical economicsts – myself included – had been saying all along: the international “rescue” operation of Greece has been a disaster: too late, too little, wrong conditionality and over-optimistic assumptions about the Greek recovery. This paper caused quite a stir in the international economics press (among others the Financial Times, the Herale Tribune, and others). The rescue operation by the IMF, the EU and the ECB had come so late that most of the private creditors had had time to sell their Greece bonds and in this way escape their own haircut; the debt sustainability analysis had counted on the cumulative fall in Greek output of around 4%, in reality between 2009 and 2012 the Greek economy lost 22% of output. Unemployment turned out (so far) to be twice as high as forecast, and so on.

Now, half a year ago, the IMF published another interesting paper in which its authors stated that the IMF assumptions about economic multipliers in their programs (in plain language: how much GDP would be affected by the IMF-required contraction of the budget deficit) had been wrong, and that in the actual case of a deep recession they were about twice as high as in their old models.

So far, so bad. There are two noteworthy things about all this. Firstly, it is very positive that a powerful international institution admits that it has been wrong. This normally does not happen, also politicians are loath to admit failures, even mistakes. But: while the IMF admits its errors, the other IMFers go happily along their trodden paths and carry on as before. In the present case, while IMF staff admit their mistakes in Greece, they concoct as similar program in Cyprus. Who is stronger – I or I? And this is not just an academic exercise, it has grave economic and political consequences, as the soup kitchens, suicides and frequently violent demonstrations in Southern Europe show.

The second strange thing is that the “rest” of the Troika, namely the European Commission and the European Central Bank, both have denounced the “mea culpa” paper, insisting strongly that their joint strategy was correct, that it is wrong (and easy) to make ex-post critiques, and that Greece was coming around. In addition, Commissioner Olli Rehn denounced personally the previous and the present IMF Managing Directors, Strauss-Kahn and Lagarde, by noting that in 2010 and before neither of them had advocated an earlier bailout of Greece.

One could put this issue aside as the vanity-driven fight of international civil servants. But, like the legendary fight between Joseph Stiglitz and Michael Mussa, the former chief economists of the World Bank and the IMF, respectively, about the correct way to deal with the East Asian crisis of 15 years ago, these fights are – in addition to personal attacks – struggles about strategy and economic paradigmata, basically about the (necessary) pre-dominance of austerity versus growth as the appropriate anti-crisis strategy. And, as I said above, they have severe consequences on the populations concerned.

For Greece, the real choice is, will there be another debt forgiveness or debt restructuring, which – given the economic data and figures is as necessary as a few years ago – or will Greece and the Greeks be condemned to further defaults and further hardships for decades, with the likely consequence of being forced out of the Eurozone. This is the real question, not the one mooted in several media, namely that the IMF might leave the Troika. Who cares about that? We should care about the Greeks and their fate, irrespective of the looming German (and Austrian) elections in the fall. We, in the Eurozone, are all Greeks. The fate of the Eurozone is


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