The International Monetary Fund is conceding a central point in the austerity argument while maintaining that heavy, rapid cuts were necessary. In an internal evaluation of the Greek bailout the IMF helped engineer, IMF staff acknowledge their predictions for the economic impact of austerity were too optimistic.
The fund predicted a 5.5 percent contraction in Greece’s economy over three years and an unemployment rate of 15 percent. In fact, GDP contracted by 17 percent and unemployment hit 25 percent.
The IMF’s admission, tempered though it is by an insistence that conditions didn’t allow for a more gradual slate of cuts, seems likely to fuel the growing resistance to austerity policies in Europe. But the report is far from a reversal on the fund’s part. It concludes that austerity remains the appropriate policy and the Greek program was “unavoidable” and “broadly correct,” despite the rosy predictions about its impact having proven spectacularly wrong.
The IMF attributes its vast underestimation of austerity’s impact in part to flawed analyst calculations, but adds that the private sector rebound austerity advocates predicted in response to the steep public-sector contractions did not, in fact, materialize.
That should sound familiar to Americans. The claim that government cuts lead the private sector to step into the breach — core to what Paul Krugman calls “the fantasy of expansionary austerity” — hasn’t proven true in the U.S. either, as companies hoard record amounts of cash despite two and a half years of focus on deficit reduction and spending cuts. As the Center for American Progress’ Michael Linden argues in a report released Thursday, “It’s time to hit the reset button on the entire fiscal debate.”