November 20, 2012
In Portugal and Greece, as in Spain, protesters took aim at the IMF as well as German Chancellor Angela Merkel. “IMF means hunger and misery,” was a slogan in Lisbon. “We are fed up to our ovaries with the IMF,” joked a feminist contingent at the Madrid demonstration. Yet the truth is that IMF leaders, themselves frustrated with austerity madness, might have grabbed a banner and joined the protest. A very public dispute has erupted between the fund and the European Union over the pace of fiscal adjustment and the need for a second restructuring of Greek debt.
At its semiannual meeting in Tokyo in October, the IMF announced that the austerity packages applied throughout southern Europe since 2009 have been counterproductive, undermining economic growth and increasing rather than bringing down public debt ratios. Greece provides ghastly proof of the failed logic of the euro orthodoxy. After three years of shock therapy, the Greek economy is in depression and will have shrunk by more than 22 percent at the end 2013, the IMF warns. Employment in Greece has fallen to 1980 levels, and Greek debt dynamics have only deteriorated. Public sector debt has soared from 144 percent of GDP in 2010 to 170 percent, and unless the official lenders agree to take a haircut in a controlled restructuring of debt—as private lenders did earlier in the year—Greece may be forced to leave the euro. “The IMF has admitted the blunder, but tell that to the Greeks,” said Zoe Lanara, international relations secretary of the Greek General Confederation of Labor at a conference organized in October by left think tank TASC in Dublin.
The incompetence and negligence in the management of the crisis is staggering. In 2010, the troika of the European Commission, the European Central Bank and the IMF had calculated a manageable impact on growth of the adjustment packages in Greece, Ireland and Portugal, with fiscal multipliers in the region of 0.5. That means for every 2 billion euros’ worth of cuts, maybe 1 billion would have been lost in GDP. But the fund now believes this is far too low: “IMF staff research suggests that fiscal cutbacks had larger-than-expected negative short-term multiplier effects on output,” says the fund’s latest Economic Outlook report. Far from 0.5, “our results indicate that multipliers have actually been in the 0.9 to 1.7 range.” This, the IMF notes, “may explain part of the growth shortfalls.”