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Key Driver Of International Austerity Push Now Says Europe Must Forgive Greek Debt

CREDIT: AP
CREDIT: AP

A day after agreeing to discuss a new Greek bailout, the International Monetary Fund (IMF) has warned European Union leaders that their expectations for Greece’s financial future are unsupported by the facts. A realistic accounting of things requires Europe to agree to forgive Greece’s debts or else leave them uncollected for a generation, a leaked report from the group says.

The IMF is a key player in the international finance community that shapes the Greek negotiations. In a report obtained by Reuters, IMF officials underscore what a variety of observers have been writing about the situation for some time now: that Greece cannot be asked to undertake further austerity or repay its massive debts in full on a standard schedule.

Either Greece must be allowed to make no payments at all on its debts for three decades or the country’s creditor nations must accept that they’re never getting all their money back, the IMF document reportedly says. European leaders agreed Monday to re-open negotiations for a new bailout with Greece roughly a week after Greek voters soundly rejected a proposal to extend the existing austerity-for-loans deal.

The IMF was a key driver of the early austerity terms imposed in Greece’s first two bailout deals. To justify the pain those spending cuts and tax increases would cause, researchers predicted the Greek economy would experience only a couple years of steep contraction before rebounding dramatically.

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That didn’t happen. Instead of a three-year contraction of 5.5 percent of GDP, Greece lost one-sixth of its economy in that first few years of the bailouts. At this point, a full quarter of the Greek economy has evaporated. The IMF had projected that the unemployment rate would rise to 15 percent before the promised benefits of austerity could kick in and start dragging it back down. But the jobless rate quickly topped 25 percent, where it remains today. The IMF has acknowledged its projection errors but attributed them to mathematical failures rather than the broader failure of the austerity idea.

The economic contraction is so severe that the very thing austerity was meant to compress — Greece’s debt load — has instead exploded. Greece is now 35 percent deeper in debt than it was in 2009. Greece’s ratio of debt to GDP will continue to rise in the coming years, according to the leaked IMF report, topping out at close to 200 percent instead of the 177 percent previously forecasted.

Vast human pain lies behind those abstract statistics: birthrates are down, stillbirths are up, public health funding has been slashed, and bank runs have left even those Greeks fortunate enough to have some money right now unable to access enough of it to live securely.

The intellectual roots of the bailout-plus-strict-austerity system for handling Greece’s debt crisis are rotten. The idea is that cutting the public sector of an economy down to the bone will foster a private-sector resurgence so powerful that it swamps the negative effects of austerity on the human beings who make up an economy. But this “fantasy of expansionary austerity,” as Paul Krugman calls it, didn’t actually work — and now that Europe’s leaders have been entertaining the fantasy for five years, reality is setting in that Greece simply cannot be made to repay its full borrowing in the ways that German leaders in particular are demanding.

Germany ought to know better, according to French inequality economist and debt scholar Thomas Piketty. In a recent interview with German newspaper Die Zeit, Piketty pointed out that Germany itself “has never repaid its debts. It has no standing to lecture other nations.” The country’s modern prosperity owes in part to international agreements to ease Germany’s cross-border debt obligations, in particular after the end of World War II. Germany’s post-war debt burden was also about 200 percent of its GDP — and 60 cents of every dollar of those debts was cancelled outright while the rest was restructured on a more generous repayment timeline.

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“We need a conference on all of Europe’s debts, just like after World War II,” Piketty said. “A restructuring of all debt, not just in Greece but in several European countries, is inevitable.” He called austerity proponents’ projections of how Greece could control its budget deficits in the coming years “completely ridiculous.”

The IMF report may lack Piketty’s analogical flair and historical sweep, but its conclusions appear basically aligned with his. The report “noted that few countries had ever managed to sustain the primary budget surplus…expected of Greece” according to Reuters and “challenge[s] the assumption by some European officials that Greece will be able to meet some of its financing needs from the markets” rather than from its European partners.