The IMF has released a fairly remarkable piece of self-criticism (pdf) over policy in Greece. On a first read, the report seems to suggest two main failings on the IMF’s part: it failed to acknowledge early on that Greece simply could not repay its debt in full, and it vastly underestimated the economic damage austerity would inflict.
Both errors were, if I may say so, obvious at the time. The troika plan was clearly not realistic — and just about all of us on the Keynesian side were warning, loudly, that multipliers estimated from normal periods with offsetting monetary policy were grossly misleading for fiscal policy under current conditions. All one can say is that the IMF was better than the rest of the troika, with the ECB in particular actually buying in to the fantasy of expansionary austerity.
What could/should have been done differently? The report more or less acknowledges that the pain would have been less with some major debt forgiveness upfront, but dismisses the notion of a more gradual adjustment on the grounds that the financing wouldn’t have been available. But look: if we’re willing to imagine a world in which the troika was willing to admit in 2010 that major debt forgiveness was necessary, why not also imagine that in this world the ECB was willing from the start to backstop sovereign debt the way it finally began to do years later? I think it’s possible to envisage a Greek program that began with a big debt writedown, traded off nasty but not crippling austerity for substantial bridge loans from the ECB, and in which Greece returned to the private market in 2012 or so.
OK, it wasn’t going to happen politically, and maybe even if it did the price would have been socially disastrous. But in that case you have to wonder whether it was worth trying to keep Greece in the euro at all. “Grexit” would have been ugly, and will still be ugly if it eventually happens. But compared with what has actually taken place?
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