by Guntram B. Wolff
July 14, 2015
This blog draws two lessons from the failed Greek programme. Olivier Blanchard is right that the fiscal adjustment of the last 5 years was unavoidable. An earlier debt restructuring could hardly have prevented it. (1) However, an earlier debt restructuring would have allowed significantly lower primary surpluses from now on and it would have made the programme more credible. Higher confidence in Greece would have provided more political and financial stability, essential ingredients for growth. Financial contagion was probably an incorrect argument for delaying debt restructuring. Even if it had been right though, it did not change the underlying problem of debt unsustainability. (2) Equally important, the IMF failed to prioritise a strategy for Greece to regain competitiveness. The programme initially made a correct diagnosis of Greece’s major competitiveness problem. The problem was a result of the pre-crisis Ponzi scheme with ever-increasing deficits financing higher public salaries and rising pensions. However, conditionality on improving the business environment and product markets, augmenting competition and lowering wages through the abolition of the 13th month salary were weak or absent. This made a turn-around of the economy away from a bloated state sector towards a larger export sector impossible. Contrary to Portugal, exports hardly increased in Greece. Political economy considerations would have called for a frontloading of structural reforms for which the political energy in 2013/14 was clearly lacking – despite later IMF insistence on such reforms. These mistakes raise significant questions on the governance of the IMF. They also call for drawing the right lessons for the third programme.
The IMF’s chief economist, Olivier Blanchard, just came out with a robust defence of the IMF policy choices in Greece. His piece is clear and deserves careful reading and analysis. It is important to understand the key mistakes in the Greek programme and to draw the right conclusions.
Greece's 30 June failure to meet a payment obligation to the International Monetary Fund starkly exposed the wider failure of the Greek financial assistance programme. It was the biggest missed payment in the IMF's history and highlights the uncertain prospects of repayment of the €24 billion the IMF has outstanding to Greece. However, the IMF’s exposure is small compared to the exposure of the euro-area institutions, which amounts to more than €190 billion.