The International Monetary Fund finally realizes what every doctor would advise an overweight patient: that fast fiscal diets are too unhealthy and too dangerous for people – and governments. That’s more or less the conclusion of IMF Economic Counsellor Olivier Blanchard and research-department economist Daniel Leigh, conclusion published on a working paper.
In their 43-page report “Growth Forecast Errors and Fiscal Multipliers” the two economists stress in their introduction note:
“This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.”
Blanchard and Leigh show that the IMF’s recommendations on trimming down budgets were much too fast and starved the economies of much-needed energy particles like growth.
“ Messrs. Blanchard and Leigh calculate IMF and European economists underestimated the euro-for-euro effect of cutting government budgets. While economists expected that cutting a euro from the budget would cost around 50 cents in lost growth, the actual impact was more like 1.50 per euro. (WSJ)
The errors in calculations are forecasts are being paid by the people where the IMF rushed with its helping hands
In Greece, which has implemented draconian austerity measures at the request of the IMF, the European Commission and the European Central Bank in order to receive bailout funding, the results are seen on the streets where a middle class has plummeted into poverty. 1 out of 3 Greeks now lives in poverty and average salaries have been slashed to just several hundred net euros a month. Homelessness, which was rarely seen in that country, is now endemic in certain parts of Athens. The unemployment rate has reached a record 26%, with more than 50% of Greece’s youth out of a job.
Greece received billions of euros in bailout funds, but a large part of why austerity didn’t work in Greece is because it wasn’t offset by any viable growth strategy. In fact, Greece’s bailout funds at one time were simply wired into an escrow account that the government couldn’t touch and then wired back for debt service to European banks just days later (read the NYT report here). In other words, not only was there painful cuts, but any money coming into the country was initially spent almost exclusively on debt reduction rather than on stimulating the economy. Cuts were certainly necessary in Greece, but today’s IMF report reinforces the conclusion that the pace and depth of cuts and the lack of any corresponding growth plan have plunged Greece deeper into its economic crisis. ( excerpt via HellenicAmericanLeadershipCouncil)
But as expected the IMF does not recognize any errors and mistakes, and it notes right away on top of the working paper that:
“This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.”
Who would ever imagine that austerity programs without growth strategy were a recipe for disaster? But you know what? I do not believe that the lack of growth strategy is due to a calculation error. It’s on purpose in order to destroy vulnerable countries for the shake of profiting sharks.
Read the full Blanchard/Leigh report here.