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A rose by any other name: The last thing Greece needs is more austerity

Wednesday, December 14, 2016  |   |  Tags:

Here we are again. More bailout negotiations, more back-and-forth over austerity and debt relief.

The latest chapter in Greece’s seemingly never-ending saga concerns the International Monetary Fund, which has refused to engage in Greece’s latest bailout program (Greece is on its third bailout since 2009).  The IMF’s position has been that Greece’s creditors must give Greece some form of debt relief (a position shared by Greece’s government). Eurozone leaders have drawn the line on debt relief, calling instead on Greece to implement tough reforms and other measures instead.  

So where does that leave the IMF? Well, the latest drama began when officials at the IMF published a piece rejecting austerity but calling for more pension and tax reform:

The IMF’s European director Poul Thomsen and head of research Maurice Obstfeld published a blog post on Monday night in which they denied that the Fund was responsible for asking Greece to adopt more austerity measures and claimed that the country’s pensions and tax benefits are still too generous.

Finance Minister Euclid Tsakalotos confronted the IMF mission chief Delia Velculescu over the blog post when talks between the Greek government and the institutions resumed in Athens Tuesday. Velculescu is said to have assured the Greek minister that the IMF did not want to make negotiations harder but simply to express its view.

The eurozone bailout fund has chided the IMF for its post, citing the desire to keep negotiations private.

The IMF’s post was a paradoxical one. On the surface, it clearly struck an anti-austerity note, from its headline (“The IMF is Not Asking Greece for More Austerity”) to repeatedly emphasizing that “The IMF is not demanding more austerity.”

But then, there were passages such as this:

While Greece has undertaken a huge fiscal adjustment, it has increasingly done so without addressing two key problems—an income tax regime that exempts more than half of households from any obligation (the average for the rest of the Euro Zone is 8 percent) and an extremely generous pension system that costs the budget nearly 11 percent of GDP annually (versus the average for the rest of the Euro Zone of 2¼ percent of GDP). Instead of tackling these difficult problems, Greece has resorted to deep cuts in investment and so-called discretionary spending. It has done so to such an extent that decaying infrastructure is hampering growth and the delivery of basic public services such as transportation and health care is being compromised.

That’s actually not true. Pensions have been cut some ten times since 2009, and this was the situation last year, as reported by Reuters:

The average Greek pension is 833 euros a month. That’s down from 1,350 euros in 2009, according INE-GSEE, the institute of the country’s largest labour union. Moreover, 45 percent of pensioners receive monthly payments below the poverty line of 665 euros, the government says. With more than a quarter of Greek workers jobless, many rely on parents and grandparents for financial support.

Earlier this year, Huffington Post profiled the effect of pension cuts on Greece’s elderly.  And just this spring, Greece again passed painful tax and pension reforms. Again, more than 45% of pensioners receive payments below the poverty line. How does the IMF propose cutting that even more?

That’s not to say there still isn’t much work to be done to reform the pension system. There is, especially at the top. But to claim as the IMF has in its post that Greece has refused to “tackle” the “difficult problem” of pension reform is disingenuous.

Finance Minister Tsakalotos also pointed out the errors in the IMF’s piece:

“The IMF is economising with the truth when it says it is not asking for more austerity but rather is the victim of Greece’s bizarre predilection to ‘agree’ to higher primary fiscal targets of 3.5% of GDP,” said Tsakalotos. “Greece has not ‘agreed’ to anything yet.”

Tsakalotos charged that the IMF was advocating policies that were bound to increase inequality and social exclusion – contradicting its own self-avowed goal of inclusive growth.

“In effect it is arguing for Greek pensioners and poorer wage earners to make further economies,” he continued, conceding that Athens had proposed a primary surplus target of 2.5% which neither the EU nor IMF had deigned to consider. “Greek expenditure on both pensions and other subsidies is about 70% of the EU average and 52% of that of Germany.”

The latest and very public spat between Greece, its creditors and the IMF highlights the need to get Greece off of this hamster-wheel fiscal policy and on a more sustainable path. The IMF cannot have it both ways. It cannot sit on the sidelines and urge further pension cuts and tax reforms without using its leverage to convince creditors to debt relief or true debt restructuring. And Greece’s lenders can’t have it both ways either. They cannot call for a 3.5% surplus without acknowledging that you can’t take blood from a stone; with an unemployment rate of 23% (and around 42% for youth), an aging population and a brain drain taking away Greece’s brightest to distant lands, where is that surplus going to come from without some form of debt relief?

When the IMF admitted it miscalculated the fiscal multipliers central to its Greece policy, and when it became a strident voice for debt relief, Greece thought it finally had a major player on the international stage on its side. The IMF’s post is disheartening in that it refuses to properly recognize the sacrifices of the Greek people as they chase some sort of beacon of light leading out of its dark days.

Greek Prime Minister Alexis Tsipras is set to meet with German Chancellor Angela Merkel in Berlin on Friday. In the meantime, Greek Finance Minister is calling for an “honest compromise” with creditors, and, most importantly, a swift resolution to the bailout review so that Greece can move on to the next phase. It’s increasingly likely that review won’t be completed this year and that Greece won’t see any certainty until early next year in terms of how its creditors and the IMF plan to proceed.

Greeks, meanwhile, are stuck in policy purgatory, forced to relive the same debt drama every few months, wondering what will be cut this time, looking for true leadership, and seeking an end to their nightmare. It is unfortunate that all the players at the table appear content to let the same scenario play over and over again, year after year, without giving Greeks the promise of a better future they deserve.

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