Reflections

Written By: Elizabeth Matsangou
Published: April 12, 2017 Last modified: April 11, 2017

Greece is once again on the international agenda as the IMF and the EU continue to squabble about what steps should next be taken for this endlessly afflicted economy. On the one side of a year-long debate, the EU maintains that austerity measures and severe targets are necessary in order to combat an economic crisis that has been raging for the best part of a decade now. On the other, the IMF proposes more long-term debt relief for the state, while reprimanding the unreasonably severe targets given to Athens as a result of the Union’s €86bn bailout package in 2015.

“Greece does not need more austerity at this time,” states the IMF in a blog posted in December. The piece goes on to say that a primary budget surplus target of 3.5%, which the EU demands must be achieved by 2018, would create “a degree of austerity that could prevent the nascent recovery from taking hold”.

As such, the IMF’s participation in a new bailout for Greece, scheduled for mid-2018, hangs in the balance. Adding further to this dubiousness is a rare public split within the IMF’s own board, which took place during the Fund’s annual review of the Greek economy on February 7. Specifically, though most of the board remained in favour of a more achievable fiscal surplus target of 1.5% by 2018, some argued in favour of the EU’s 3.5% target instead.

Given that the IMF stepped away from the EU’s last bailout package over similar disagreements, it is quite likely that history will once again repeat itself, even in spite of the Fund’s active involvement in the latest negotiations. Great concern has been voiced that should this happen, the entire rescue plan could collapse.

What some fail to glean from this ongoing debate, however, relates to the question of the very involvement by the IMF in the first place. Though yes, the organisation rightly argues that Greece needs greater debt relief, and in this respect, is fighting in the country’s corner, external influence in general has only embroiled the country’s economy increasingly since the Euro crisis first hit the region.

A constant stream of extreme austerity measures has simply not worked for Greece. As Nobel Prize winner Paul Krugman wrote, since 2010, “Every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity.”

Stringent targets have only expanded Greece’s debt, driven down wages, driven up unemployment and wreaked havoc on social infrastructure, all of which have severely affected the populous, while stunting the economy’s ability to realise long-term growth. In fact, it comes as no surprise to most that another bailout is on the cards for Greece; for it would seem that this troubled state now just goes from one to the other, and with each, its inability to
recover grows.

Greece is not alone in this nightmarish scenario. Take Mexico during the aftermath of its so-called Tequila Crisis. Under the IMF’s economic reforms, a severe recession ensued; financial institutions collapsed, unemployment soared, extreme poverty climbed to over 50%, while the average national income fell by around 20%. Yet the IMF’s involvement was rarely questioned, the facts laid out often ignored. It even appears that the very nature of granting a loan to an economy in desperate need of funds erases all the bad baggage that comes along with it.

However, it can be argued that receiving a loan from the likes of the IMF is when a country’s problems truly begin. As shown throughout the IMF’s history, the majority of countries that have, always have to go back for more, in somewhat of a tragic comic parody. These already struggling economies can never pay off their loans, nor are they given the chance to recover and encourage necessary economic activity. Simply, the programmes set out by external parties almost always end up failing.

As Greece heads towards yet another bailout package, it seems that its fate has already been written. It was, in fact, written when the state was given its very first loan back in 2010. But it does not have to be this way.

While it may be unpopular with many EU taxpayers, what Greece really needs is additional debt relief. Instead of implementing more austerity measures that will only harm its population further, Greece needs to realign its focus on its population, which includes investing in human capital, encouraging consumer spending and regaining the confidence of investors, all of which can actually contribute to its economic recovery.

There has been talk recently of Greece being an experiment of international lenders. Well, unfortunately, that may be the case. But it is high time for a new experiment, one that sees those lenders back away to give this state space to get back to basic economic principles.