IMF on Greece – they haven’t learned from their mistakes

In the most recent take of the Greek crisis, the IMF seems to have come out as being the reasonable part of the Troika as a result of its last minute release of a document where it said that Greece’s debt position was unsustainable and that any longer-term settlement of the crisis would require “debt relief measures that go far beyond what Europe has been willing to consider so far”. But a closer reading of that report (July 14, 2015) – An Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis – tells me that the IMF hasn’t learned very much at all from the disastrous and repeated mistakes they made that have deepened and prolonged the Euro crisis. They are still hanging on to the neo-liberal mantra that if only Greece had followed the ‘structural reform’ program fully it would now be out of crisis and not in need of debt relief. It is a pipe dream that only these neo-liberals can contrive when their whacky ideas are confronted with the reality of the monetary system.

The IMF’s last minute intervention in the scandalous Eurogroup treatment of Greece is a story in itself. But I don’t have the necessary information to speculate on who forced it to publish the report at the last minute.

The rumours are that the Euro elites didn’t want it to be made public because it might undermine their hard line against the beleagured nation.

But, they should not have worried. The IMF Report retains all of the neo-liberal Groupthink and continues to blame Greece for its own situation.

On October 12, 2014, the IMF released a – Statement on Greece – which reported on a meeting between Madame Lagarde and the Greek Finance Minister and the Greece’s central bank governor.

The press release said:

Ms. Lagarde commended the authorities for the significant improvement in Greece’s fiscal position and encouraged them to implement decisively key structural reforms in line with program commitments.

Earlier (June 10, 2014), in its – Fifth Review Staff Report – the IMF discusses the “magnitude and quality of Greece’s fiscal adjustment” and said that the massive fiscal shift that has occurred in Greece has “been largely expenditure led”.

They talk about the “Revenue policies … steepen the rate structure and streamline income tax exemptions, introduce the social solidarity surcharge, strengthen taxation of pensions and social benefits, and considerably scale up taxes on properties. Structural efforts among other revenue items have been more equally balanced and are based on increases in the rate structure of social contributions and VAT as well as on measures to enhance compliance.”

On the expenditure side, they note that around “half of the primary adjustment in spending” has come from cutting public service salaries and pensions.

They also note that “Public capital formation has been cut to 2.1 percent of GDP in 2013, which is low by international standards”, which in itself should raise alarm bells in the context of their other narrative – improving the competitiveness of the economy.

It is hard to become a more productive economy if public and private investment in capital infrastructure is cut to the bone.

Taken together, the fiscal shift resulted in a “significant primary fiscal surplus in 2013, well above target and ahead of schedule”. They discuss this shift in terms of the surplus to GDP ratio which was 0.8 per cent in 2013 and say that this reflects “underspending of the budget … and higher revenue outturns toward end-2013”.

The result was that Greece recorded:

… the highest cyclically-adjusted primary balance in the euro area.

Of course, in 2014, the Troika upped the ante even further to push for a “primary surplus target of 3 per cent of GDP” and claimed that:

… the projected pickup in revenues with the cycle is, in staff’s view, insufficient to deliver the targeted increase in the primary surplus.

They also were demanding that the primary surplus rise to 4.5 per cent of GDP in 2016.

Which therefore, following their logic, would necessitate even harsher expenditure cuts.

As you read these documents, and I have only mentioned two in a sequence of similar documents one is lulled into a sort of stupefaction. The revenue and expenditure ratios (to GDP) and all the rest of the ‘adjustment’ jargon takes on a logic of itself.

While the IMF might focus on an increasing tax take as a percent of GDP, the reality is quite different.

And, of course, the Greek people do not talk in terms of ratios.

The following graph shows general government expenditure and revenue as a percent of GDP from 2000 to 2014 (using IMF WEO data).

The difference between the two is the actual fiscal deficit, which includes interest payments. The IMF point to the rising tax revenue as a percent of GDP as a sign that consolidation is underway and Greece is heading in the right direction.

They also consider the rather sharp decline in government spending as a percent of GDP to be indicative of a successful consolidation.

In a Nomura Briefing (July 14, 2015) – EU refuses to acknowledge mistakes made in Greek bailout – Richard Koo noted that the IMF and EU emphasis on spending and revenue as a proportion of GDP as a way of gauging the progress of the Greek consolidation was potentially very misleading.

He wrote:

Nearly all of the Greek analysis produced by the IMF and the EU has discussed matters relative to GDP, whereas Greek standards of living are linked directly to the absolute level of GDP.

Remember a ratio has two components – a numerator (on top) and the denominator (on the bottom). So a ratio can rise or fall even though both components fall (rise). In other words, take the government revenue to GDP ratio (red line).

One might be tempted to conclude after reading a plethora of IMF reports and analysis that the tax rate increases that the Troika have imposed on Greece would have generated increased tax revenue.

But have a look at the following graph, which shows the absolute tax revenue (in billions) and the revenue as a percent of GDP (red line – right axis).

It is clear that even though the tax proportion of GDP has risen since the austerity was imposed the total tax revenue has fallen because the fiscal austerity has destroyed the growth prospects of the Greek economy.

The ratio of tax revenue to GDP had risen only because GDP (the denominator) has declined faster than the tax revenue take (numerator).

Richard Koo wrote:

The reason is that Greece’s GDP has plunged because fiscal consolidation was carried out during a balance sheet recession, resulting in a destructive deflationary spiral that has devastated the lives of ordinary Greeks.

While the nation may appear to be making progress when we view the data as a percentage of GDP, the raw data show an economy in collapse. This difference in perspectives widened the gap separating European creditors who thought everything is going well, and the Greek public who has been suffering serious declines in their standard of living. And this rift in perceptions was perhaps nowhere as evident as in the results of the national referendum on 5 July.

From the expenditure side, the ratio of General Government expenditure as a percent of GDP has fallen but the IMF has noted that it should fall more quickly.

But the next graph shows that the reduction in public spending has been substantial in Greece of the austerity period and it is this absolute spending that creates employment and improves the well-being of the Greek people.

The reason the public spending to GDP ratio has not plunged to the liking of the IMF is that the cuts in public spending have undermined overall growth, so the Greek government has been chasing a moving target.

The IMF wants reductions in the spending ratio but as the Government cuts spending the denominator (GDP) also contracts and the ratio doesn’t fall as much as the IMF would like.

And then we read the IMFs latest update on Greek debt (the much heralded July 14 document. There we read:

About a year ago, if program policies had been implemented as agreed, no further debt relief would have been needed to reach the targets under the November 2012 framework.

In other words, they want the Greek government to maintain the hellish cuts and so-called structural changes (I don’t use the term reform to describe them), which would have made the collapse in real GDP even greater had Syriza not eased up a little.

There is no convincing evidence that these structural reforms – attacking trade unions, privatisation, cutting wages, reducing price rigidities – will stimulate growth.

As Richard Koo says:

… his argument is based on the highly unrealistic assumption that structural reforms can give a quick boost to GDP growth.

Structural reforms are by nature microeconomic-not macroeconomic-undertakings. The aim of measures such as deregulation is to prompt people to change their behavior and engage in new enterprises, eventually leading to a more vibrant economy. This process naturally requires a great deal of time.

Conclusion

What the EU and the IMF have failed to recognise is that when an economy is mired in a depression, as is Greece, attempting to engineer cuts in the fiscal balance (by tax hikes and/or public spending cuts) will be self-defeating because they reduce GDP.

When attempting to appraise the fiscal position of a nation using ratios (as a percent of GDP) this reality means that misinterpretation of the state of play is common.

In Greece’s case, despite the tax take as a percent of GDP rising, the total tax revenue has been falling because GDP has collapsed.

Attempting to impose harsh structural changes on an economy in that state then amplifies the negative impacts on the well-being of the people.

Structural changes require that resources shift from their current use to other more desired uses. When the economy is mired in depression, the transitions and mobility of resources is thwarted and no major gains eventuate.

The fact that the IMF still believes that Greece should accelerate its structural program tells me it hasn’t learned from its past major mistakes, which should have seen high ranking officials imprisoned for professional negligence.

It is a short blog today as I have come down with a nasty flu/cold and haven’t much energy.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.