The I.M.F. Admits Mistakes. Will Europe?

Somewhere ... Somehow ... In EuropeThe International Monetary Fund admitted this week that it made big errors in the first bailout of Greece three years ago, but it added no matter what it did then Greece would have suffered deep recession. European Union officials, by contrast, still refuse to concede their handling of the financial crisis has been deeply flawed. In 2010, the fund joined the E.U. and European Central Bank in providing loans totaling 110 billion euros ($145 billion at current exchange rates) to Greece. In exchange for that money, Greece committed to cutting its fiscal deficit and reforming its economy. But that deal was based on faulty, overly rosy predictions of country’s economy, government finances. Now IMF says it should have known the agreement would leave Greece with far more debt than it could have ever hoped to pay back. It also says it underestimated damage that government spending cuts and tax increases would do to the Greek economy. Employees of the fund raised some of these concerns in 2010. But the European leaders ignored those warnings because they did not want to put up more money to help Greece, force banks to take losses on their holdings of Greek bonds, risk undermining investor confidence in other troubled European countries like Spain and Italy. The I.M.F. stops well short of concluding the demands made on Greece were wrongheaded and devastating to its economy and society. In spite of the errors it acknowledges, the fund bizarrely finds that the “overall thrust of policies” used by the fund and the European leaders in Greece was “broadly correct.” Whatever the policy makers say does not alter the reality that their bad decisions continue to hobble much of Europe. Greece was eventually allowed to restructure its debts, but had it done so earlier it might have avoided some of the economic pain, which shows no meaningful sign of an easing. The most recent statistics put Greek unemployment at 27%, up from 12.5% in 2010. The report concludes European leaders were unwilling to consider alternative policies like debt restructuring until need for it became abundantly clear year later. They remain just as stubborn today: on Thursday, a spokesman for European Commission said that it “fundamentally disagrees” with I.M.F. report. Instead of learning from past errors, “lovely” European officials seem content to repeat them in Spain, in Italy, elsewhere. (source: The Editorial Board – NYTimes – 08/06/2013)

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One Response to The I.M.F. Admits Mistakes. Will Europe?

  1. Professor Uziel Nogueira says: The slow tempo in employment recovery should not come as a surprise. At the IMF, there is a rich economic literature analyzing ex post impact of financial meltdowns all over the world during the last few decades. In all cases of deep financial crisis, full employment takes a long time (almost a decade on average) to be restored. The reason is the financial sector. As long as the system is overloaded with bad debt, the basic function of credit intermediation cannot be performed properly. In the US case, trillions of dollars of bad housing loans did not disappear by magic. The US financial system is far from being healthy and functional. It is convalescent at the FED’s ward and being fed easy quantitative easing credit to recovery. As long as the financial system is not fully healthy, economic growth will falter and employment will continue to suffer.

    http://www.nytimes.com/2013/06/08/business/economy/us-added-175000-jobs-in-may-jobless-rate-rises-to-7-6.html

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