Posts Tagged ‘IMF’


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Greek workers have begun a 3-day general strike in protest against further austerity measures that are being proposed in return for more bailout money from their European creditors.

Even the Wall Street Journal admits that the proposed package of fiscal retrenchment measures is unsustainable, as it could come to 5 percent of Greece’s gross domestic product.

Eurozone finance ministers are holding a special meeting on Monday to debate the problem. Few expect a solution. One is needed at the latest by July, when Greece will default on bond debts unless a deal unlocks fresh bailout aid. The number causing the most grief is 3.5% of GDP: the primary-surplus target written in last year’s Greek bailout agreement. “The IMF thinks the primary objective should be lower. That would help Greece,” says David Mackie, chief European economist at J.P. Morgan.

Aiming for a smaller surplus would allow for less austerity, and for the Greek economy to breathe, IMF officials have argued for months. But it would also entail restructuring European loans to Greece, so that its debt doesn’t spiral ever higher. At a minimum, the IMF wants Europe to postpone Greece’s payment obligations by decades.

Eurozone governments led by Germany don’t want to take a hit on their Greek bailout loans, which total €205 billion ($234 billion) so far. Berlin is insisting the primary-surplus goal can’t be changed.

The fact is, since 2010, a succession of Greek governments have enacted spending cuts and tax increases worth a total of 32.3 percent of GDP, “a scale of austerity far beyond that seen in any other European country during the financial-crisis era.”

Greek workers are saying no more—and even the Wall Street Journal, which still considers the previous austerity measures to have been “inevitable,” can’t find a policymaker or economist who “argues that further belt-tightening on that scale is what Greece’s economy needs at this point.”


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Trust this!

Posted: 15 July 2015 in Uncategorized
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Simon Wren-Lewis gives the lie to the idea that Europe’s lack of trust in Greece is responsible for the current crisis.

But does this help explain why other Eurozone countries keep going on about how Greece has lost their trust? I think the answer is a clear no. In fact I would go further: I think this talk of lost trust is largely spin. The issue of trust might have explained the total amount the Troika lent from 2010 to 2012. However, as I have said often, the mistake was not that the total sum lent to Greece was insufficient, but that far too much of it went to bail out Greece’s private sector creditors, and too little went to ease the transition to primary surplus. . .

The narrative about failing to deliver is just an attempt to disguise the fact that the Troika has largely run the Greek economy for the last five years and is therefore responsible for the results.

If anything, the Greek people are the ones who have learned they can’t trust the governments in power in the rest of Europe to do anything other than extract an enormous tribute—in the form of “extensive mental waterboarding” and continued austerity measures—in order to come up with the necessary funds to restore the banking system and give the country some breathing room.

So, who can they trust? They might be inclined to lend credence to the IMF, which has now acknowledged in an update (pdf) to its recent debt sustainability analysis (pdf) that Greece needs significant debt relief.


Just two weeks ago, the IMF argued that the peak in debt (at 177 percent of GDP in 2014) was already behind us and that gross debt financing would remain below a safe (15-percent) threshold. Now, its estimates are much higher: debt would peak at close to 200 percent of GDP in the next two years and gross debt financing levels would exceed 15 percent and “continue rising in the long term.”

The problem is that the IMF blames the dramatically revised scenario on events in the past two weeks. No Greek should accept (nor should the rest of us) that two weeks of capital controls could alone raise the debt ratio by 28 percentage points of GDP a full seven years later. The IMF is simply unwilling to accept the fact that its own analyses and policies—alone and in conjunction with the other two members of the troika—have gotten it terribly wrong.

The result has been an economic depression and social crisis unseen in Europe since the 1930s.

That just leaves the Greeks themselves, who need to trust they can buy themselves some time to enact the anti-austerity structural reforms necessary to dig themselves out of the current crisis. That’s probably going to mean confronting not only the elites in Europe that are pushing the current bailout plan, but also eventually its own elite that has put the country in such dire straits in the first place.


While the policy side of the IMF continues (with the other members of the troika) to push for austerity measures in Greece, its research side (against the grain of much of contemporary mainstream economics) is sounding the death knell of trickle-down economics.

I am referring to the recent report, Causes and Consequences of Income Inequality: A Global Perspective, prepared by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta [pdf]. Their main finding (based on an analysis of data for 159 advanced and emerging markets and developing economies) is that there’s an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.

Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

To my mind, cross-country studies of this sort should always be taken with at least a few grains of salt (precisely because the causes and consequences of inequality vary across countries, and correlation is not causation). And the specific coefficients (such as the idea that “if the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years”) even more so (because, as I’ve argued before, the underlying data, such as Gini coefficients, mean very different things depending on the countries studied).


Still, this IMF study does give lie to the idea that the grotesque levels of inequality we’ve been witnessing in recent decades—the dramatic rise in both top-1-percent incomes shares and corporate profits—are a necessary condition for economic growth.


Most important, the IMF study challenges the idea that everyone eventually shares in whatever economic growth has taken place (which is dramatically illustrated by the growing gap between productivity and wages).

In my view, these should be considered the last nails in the coffin of trickle-down economics.


Both sides of mainstream economics will likely claim support in the International Monetary Fund’s latest report, the April 2015 World Economic Outlook—especially chapter 4, on business investment.*

The Keynesians will certainly like the relationship between investment and output—in other words, the idea that private business investment has declined since the start of the economic crisis because aggregate demand has fallen. Even more: they’ll find support in claim that fiscal policy aimed at reducing budget deficits has actually undermined private investment (which is the flip side of the Keynesian crowding-in argument, i.e., the notion that deficit spending doesn’t crowd out private investment, as neoclassical economists claim, but actually spurs or crowds in corporate investment).

The neoclassicals, for their part, will be encouraged by the focus on “business confidence,” that is, the argument that uncertainty (e.g., with respect to government policies) has played a role in discouraging business investment.

In other words, for Keynesians, the problem with insufficient business investment is mostly on the demand side; while for neoclassical economists, it’s mostly on the supply side.

And, true to form, the authors of that section of the report suggest policy changes on both the demand and supply sides:

We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to precrisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus ‘crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.

What no one seems to want to admit—the authors of the report as well as mainstream (both Keynesian and neoclassical) economists—is that private corporations, which got us into this mess in the first place, have failed to get us out of it. They’re the only ones that have benefited from the recovery, as corporate profits have reached record levels, but they haven’t responded by increasing investment. Instead, they’ve been using the profits they’re accumulated to buyback their stock, engage in new mergers and acquisitions, and distribute them to high-level executives and shareholders.

They want us to believe they’re superman. But we know they’ve simply failed—on both the demand and supply sides.

*To be clear, the chart does not indicate actual declines in business investment and output. Rather, it represents percent deviations from forecasts in the year of recessions.