Blanchard on Greece: Past Critiques and the Path Forward

So Olivier Blanchard – whom I respect very much in his role as a research director of IMF – keeps saying, what we (IMF and the troika) did in Greece, in particular the forced fiscal adjustment, was absolutely necessary given the circumstances and real time information, but Greece’s governments failed to deliver reforms and we underestimated the fiscal multipliers. Greece debt is increasingly unsustainable, but we have to continue with this medication, more reforms are needed, taxes should be increased and pensions slashed. Failing to do this would require higher amount of haircut for EU governments, which is not politically feasible.

Eeee, this amounts to saying ‘Nevermind our great research over the past 4 years showing that fiscal austerity has a contractionary impact on GDP and that structural reforms have neutral or negative impact on growth over the short or medium term, we should impose even more fiscal austerity and more structural reforms on Greece, otherwise the creditors would be unhappy‘.

Is this a clash between the academic honesty and policy making in the world of politics?

iMFdirect - The IMF Blog

IMG_0248By Olivier Blanchard

All eyes are on Greece, as the parties involved continue to strive for a lasting deal, spurring vigorous debate and some sharp criticisms, including of the IMF.

In this context, I thought some reflections on the main critiques could help clarify some key points of contention as well as shine a light on a possible way forward.

The main critiques, as I see them, fall under the following four categories:

  • The 2010 program only served to raise debt and demanded excessive fiscal adjustment.
  • The financing to Greece was used to repay foreign banks.
  • Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression.
  • Creditors have learned nothing and keep repeating the same mistakes.

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