Wednesday

19th Dec 2018

IMF economists admit to 'errors' on austerity policy

  • Anti-austerity protest in Spain (Photo: Antonio Rull)

The International Monetary Fund's (IMF) top economists Olivier Blanchard and Daniel Leigh have drafted a special working paper on their own previous "errors" in predicting the impact of austerity on European economies.

"Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation," the paper, out last week, says.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

After having briefly mentioned the problem in October in the IMF's global economic outlook, Blanchard and Leigh explain more extensively, complete with mathematical formulas, how forecasters got it wrong when assessing the impact of sharp spending cuts in places like Greece, Portugal and Spain.

Even though the paper runs a disclaimer that it "should not be reported as representing the views of the IMF," it does reflect an attitude shift in the Washington-based lender when it comes to harsh austerity measures in Europe.

Because the pace of budget cuts was much faster and growth was weaker than predicted in 2010, the so-called fiscal multipliers - a mathematical coefficient reflecting the impact of reforms on growth - was much larger than IMF economists initially estimated.

Instead of being close to zero, which means no errors, the fiscal multipliers for 2010 "were about 1.6," the paper says.

The model was adjusted in the following years. The IMF now advocates fewer budget cuts in Greece and other recession-plagued countries.

Poul Thomsen, the IMF's point-man in Greece, already last February warned against too many austerity measures and argued for a slow down on budget cuts.

Meanwhile, the fund's own chief, Christine Lagarde, in late 2012 started to call for more time for Greece and for a second debt restructuring.

But they are not the only voices in the debate.

The so-called "troikas" overseeing reform programmes in bailed-out countries also consist of the European Central Bank and the EU commission.

Both institutions are still insisting on budget cuts. And in Germany, the paymaster of all the bailouts, "fiscal consolidation" continues to be the number one condition for any further payments.

IMF chief warns of new Great Depression

IMF chief Lagarde has warned the Great Depression of the 1930s may repeat itself unless the EU pulls together and gets foreign help. Fresh unemployment statistics added to gloom by highlighting the social cost of austerity.

Greek opposition leader 'vindicated' by IMF

Greek opposition leader Alexis Tsipras feels "vindicated" by the IMF's recent change of tone on austerity, he told this website ahead of a meeting with the German finance minister.

News in Brief

  1. Financial Times picks Soros as 'Person of the Year'
  2. Italy strikes last-minute deal with EU over budget
  3. UK to unveil new immigration rules ending free movement
  4. Belgian PM resigns five months before elections
  5. EU agree to ban throwaway plastics to reduce marine litter
  6. EU agrees 2019 fishing quotas for Atlantic and North Sea
  7. 3,500 UK troops on standby for no-deal Brexit
  8. Brexit: Opposition disagrees over no confidence vote

Stakeholders' Highlights

  1. International Partnership For Human RightsKyrgyz authorities have to immediately release human rights defender Azimjon Askarov
  2. Nordic Council of MinistersSeminar on disability and user involvement
  3. Nordic Council of MinistersInternational appetite for Nordic food policies
  4. Nordic Council of MinistersNew Nordic Innovation House in Hong Kong
  5. Nordic Council of MinistersNordic Region has chance to become world leader when it comes to start-ups
  6. Nordic Council of MinistersTheresa May: “We will not be turning our backs on the Nordic region”
  7. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit
  8. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister
  9. Nordic Council of MinistersState of the Nordic Region presented in Brussels
  10. Nordic Council of MinistersThe vital bioeconomy. New issue of “Sustainable Growth the Nordic Way” out now
  11. Nordic Council of MinistersThe Nordic gender effect goes international
  12. Nordic Council of MinistersPaula Lehtomaki from Finland elected as the Council's first female Secretary General

Latest News

  1. Hackers stole thousands of internal EU files
  2. Muscat's one-man rule poses challenge for EU
  3. Orban protests target state media in new front
  4. Brexit and the Queen Sacrifice
  5. EU gives Switzerland another six months for a deal
  6. Fiscal discipline rules in eurozone are devastating
  7. EU capitals see weekend of tear gas and water cannon
  8. Bulgarian 'EU passports' whistleblower wants justice

Join EUobserver

Support quality EU news

Join us