Tuesday

6th Dec 2016

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.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

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.

No euro crisis after Italian vote, says EU

The Italian PM's resignation after a failed constitutional referendum has not changed the situation, the Eurogroup president has said. Financial markets have remained stable.

Stakeholders' Highlights

  1. European Jewish CongressEJC President Breathes Sigh of Relief Over Result of Austrian Presidential Election
  2. CESICESI Congress Focuses on Future of Work, Public Services and Digitalisation
  3. European Gaming & Betting AssociationAustrian Association for Betting and Gambling Joins EGBA
  4. ACCAWomen of Europe Awards: Celebrating the Women who are Building Europe
  5. European Heart NetworkWhat About our Kids? Protect Children From Unhealthy Food and Drink Marketing
  6. ECR GroupRestoring Trust and Confidence in the European Parliament
  7. UNICEFChild Rights Agencies Call on EU to put Refugee and Migrant Children First
  8. MIRAIA New Vision on Clean Tech: Balancing Energy Efficiency, Climate Change and Costs
  9. World VisionChildren Cannot Wait! 7 Priority Actions to Protect all Refugee and Migrant Children
  10. ANCI LazioRegio-Mob Project Delivers Analysis of Transport and Mobility in Rome
  11. SDG Watch EuropeCivil Society Disappointed by the Commission's Plans for Sustainable Development Goals
  12. PLATO15 Fully-Funded PhD Positions Open – The Post-Crisis Legitimacy of the EU (PLATO)