Empty admissions of fault
News that the International Monetary Fund’s managing director, Christine Lagarde, has ordered a probe into who bears responsibility for the failure of the Greek program during the 2010-12 period may cause all sorts of feelings depending on which perspective it’s seen from. There is also the possibility that a first feeling of something like satisfaction will quickly be followed by abject depression. Because admission of fault does not necessarily mean that anything will be done to fix its causes. Quite the opposite.
This is not the first time the IMF has admitted that its policy mix for Greece was wrong, and on previous occasions it did not lead to the Fund’s technical staff or European officials changing their tune as regards Greece or other crisis-hit countries in Europe.
Even though it is hard to remember all of the details in the massive amount of information we have received since the start of the crisis, there are some words that stick. One of them is “multipliers.” In 2013, the director of the IMF’s Research Department, Olivier Blanchard, wrote a report titled “Growth Forecast Errors and Fiscal Multipliers,” in which he said that the IMF had erred in its calculations for Greece and Portugal. When the Fund was calculating the effect of public spending cuts it should not have used the (pre-crisis) multiplier of 0.5 but something between 0.9 and 1.7. These may be tiny numbers lost in the small print, but they had a devastating effect. Because the consequences of the error were – as we read at the time and as we have been experiencing – a much larger than anticipated drop in domestic demand because of the cuts in salaries and pensions, an exacerbation of the recession and an increase in unemployment.
How did the IMF deal with its error? By admitting to another one a few months later. This time it conceded that as well as underestimating the effects of austerity, it had also overestimated the Greek economy’s growth potential. Did this make any difference? Of course not.
The fact is that politico-financial institutions like the IMF always find a scapegoat, even if it’s an entire nation. So, after exercising such stern self-criticism, the Fund concluded that the problem lay solely with the Greeks who did not implement the (flawed) program correctly. Once the IMF says something and Europe’s top officials also back it, then it’s just a matter of days before its opinion prevails worldwide as the one and only truth.
Unfortunately, it looks a lot like the same pattern will be repeated this time around if the probe is actually carried out and whatever its result.
Last week, Alternate Minister for International Economic Relations Euclid Tsakalotos, who was promoted to lead Greece’s negotiations with its international creditors, said that in SYRIZA they learn from their mistakes. Let’s hope it’s true, and that it also proves true for our creditors, who got it wrong first.
