Euro Crisis: The IMF is a Bad Doctor, and Austerity is Bad Medicine

The International Monetary Fund, which along with the European Union and European Central Bank has managed Greece's bailouts, has admitted to serious mistakes in handling the sovereign debt crisis.

The IMF acknowledged not only underestimating the effects of austerity, but also breaking its own rules to make Greek debt appear more sustainable. Greece failed to meet three of four IMF tests to qualify for financial aid.

Despite claiming the bailouts have allowed the Troika to limit fallout to the euro zone, IMF documents describe uncertainties around the bailouts as "so significant that staff was unable to vouch that public debt was sustainable with a high probability."

The IMF's "mistakes" go far beyond just underestimating austerity. The effects of such policies are well known: similar structural adjustment policies were imposed on Latin America and Africa since the 1980s with similar results.

The IMF, EU, and European Central Bank’s mistake was to disregard the deep structural problems that were the cause of the crisis — and the investment banks that helped cover them up — choosing instead to blame Greek idleness and a generous welfare state.

The Greek people, facing 64% youth unemployment and a rising suicide and homelessness rate, have paid for this mistake. After misdiagnosing the patient, the IMF continues to prescribe a dangerous medicine.

Although debt and competitiveness have been issues in Greece for decades — with high deficits recorded since the 1980s — there were no severe problems until the introduction of the Euro zone.

By abandoning the drachma in 2002, and giving control over monetary policy to the European Central Bank, Greece could no longer devalue its currency to keep exports competitive with stronger Euro zone countries like Germany.

Instead, Greece has to tried to match its neighbours by lowering workers' wages, cutting government spending, and seeking export-led growth within their overvalued currency.

With the euro's value reflecting the Eurozone's average competitiveness, to Germans the euro has become too weak and to Greeks it is become strong — a messy average that is right for nobody.

Without the devaluation option, and therefore the ability to raise revenues by making exports more attractive on the global market, Greece struggled to keep up with its debt repayments.

Since Greek loans are typically repaid over a five-year window – a far shorter time frame than the decades granted to "safe" countries such as the UK - Greece requires access to credit every few to years to continue refinancing its debts.

However when credit markets froze, and lending became unaffordable, the repayments could no longer be met. And with Europe's financial institutions holding billions of potentially worthless Greek debt, the single currency looked set to unravel.

Greece was never suited for the single currency, having always exceeded the 60% debt limit set by the Maastricht rule, and presenting a 3% deficit ceiling only through shady accounting. To pay for Europe's mismanagement, the Greeks have sold their country through massive privatization and public spending cuts.

The IMF's mistake was to protect creditors instead of fixing the fatal structural faults at the heart of the euro. By burdening Greece with billions in debt it knew to be unsustainable, the inevitable default has only been postponed and the immense suffering only prolonged.


For more updates on Greece and other stories, follow me on Twitter at @alexebennett.

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Alex Bennett

Writer based in Brighton, UK.

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