The IMF initially projected that Greece\u2019s real (inflation-adjusted) GDP would contract by around 5% over the 2010-2011 period, stabilize in 2012, and grow thereafter. In fact, real GDP fell 25%, and did not recover. And, because nominal<\/i> GDP fell in 2014 and continues to fall, the debt\/GDP ratio, which was supposed to stabilize three years ago, continues to rise.<\/p>\n
Greece agreed \u201cto generate enough of a primary surplus to limit its indebtedness\u201d and to implement \u201ca number of reforms which should lead to higher growth.\u201d Those so-called reforms included sharply lower public spending, minimum-wage reductions, fire-sale privatizations, an end to collective bargaining, and deep pension cuts. Greece followed through, but the depression continued.<\/p>\n
The IMF and Greece\u2019s other creditors have assumed that massive fiscal contraction has only a temporary effect on economic activity, employment, and taxes, and that slashing wages, pensions, and public jobs has a magical effect on growth. This has proved false. Indeed, Greece\u2019s post-2010 adjustment led to economic disaster \u2013 and the IMF\u2019s worst predictive failure ever.<\/p>\n
Blanchard should know better than to persist with this fiasco. Once the link between \u201creform\u201d and growth is broken \u2013 as it has been in Greece \u2013 his argument collapses.<\/p>\n
Apart from pensions and wages, spending has already been \u201ccut to the bone.\u201d And remember: the effect of this approach on growth was negative<\/i>. So, in defiance of overwhelming evidence, the IMF now wants to target the remaining sector, pensions, where massive cuts \u2013 more than 40% in many cases \u2013 have already been made. The new cuts being demanded would hit the poor very hard.<\/p>\n
Pension payments now account for 16% of Greek GDP precisely because Greece\u2019s economy is 25% smaller than it was in 2009.<\/p>\n
To get pensions down by one percentage point of GDP, nominal economic growth of just 4% per year for two years would suffice \u2013 with no further cuts. Why not have \u201ccredible measures\u201d to achieve that<\/i> goal?<\/p>\n
This brings us to Greek debt. As everyone at the IMF knows, a debt overhang is a vast unfunded tax liability.<\/i><\/p>\n
Greece\u2019s debt has not been sustainable at any point during the last five years, and that it is not sustainable now. On this point, Greece and the IMF agree.<\/p>\n
In fact, Greece has a credible debt proposal. First, let the European Stabilization Mechanism (ESM) lend \u20ac27 billion ($30 billion), at long maturities, to retire the Greek bonds that the European Central Bank foolishly bought in 2010. Second, use the profits on those bonds to pay off the IMF. Third, include Greece in the ECB\u2019s program of quantitative easing, which would let it return to the markets.<\/p>\n
Now it is the IMF\u2019s turn, beginning with the decision to admit that the policies it has imposed for five long years created a disaster. For the other creditors, the toughest choice is to admit \u2013 as the IMF knows \u2013 that their Greek debts must be restructured. New loans for failed policies \u2013 the current joint creditor proposal \u2013 is, for them, no adjustment at all.<\/p>\n
<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":" James Galbraith writes:\u00a0 The International Monetary Fund\u2019s chief economist, Olivier Blanchard, recently asked a simple and important question: \u201cHow much of an adjustment has to be made by Greece, how much has to be made by its official creditors?\u201d But … Continue reading ![\"IMF](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/06\/IMF-to-Ukraine.jpg\")
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