Greece does not need more austerity at this time, and in fact spending cuts have gone too far already, two senior International Monetary Fund officials said Monday (12 December).
If the eurozone country sticks to its agreement with the European Union to increase its budget surplus to 3.5%, contrary to the IMF’s recommendation, then it cannot blame the fund if it must impose more austerity to do so, the officials said in a blog post.
IMF chief economist Maurice Obstfeld, and European Department Director Poul Thomsen, who has been heavily involved with the negotiations with Greece, used the blog to defend the IMF against misinformation they say “turns the truth upside down.”
Sixty-three years after the 1953 London Debt Agreement (8 August), Greece’s Prime Minister Alexis Tsipras stressed that Europe should rise to the occasion and grant Athens a debt relief.
After days of demonstrations in Greece over new budget cuts, the officials said, “The IMF is being criticized for demanding more fiscal austerity, in particular for making this a condition for urgently needed debt relief.”
But in fact, “The IMF is not demanding more austerity,” they said. “We have not changed our view that Greece does not need more austerity at this time. Claiming that it is the IMF who is calling for this turns the truth upside down.”
On the contrary, the fund warned Greek officials against trying to push for a larger primary surplus — the surplus on the public finances before debt repayments — than the 1.5% the IMF said was achievable.
“But contrary to our advice, the Greek government agreed with the European institutions to temporarily compress spending further if needed to ensure that the surplus would reach 3.5% of GDP” as part of the loan agreement with the European Stability Mechanism, the eurozone’s bailout fund.
“We think that these cuts have already gone too far, but the ESM program assumes even more of them,” Obstfeld and Thomsen wrote.
The Greek government has invited the leaders of five southern EU countries, including France, Italy and Spain, to Athens in a bid to forge an anti-austerity alliance.
Eurozone finance ministers a week ago approved new debt relief measures to alleviate Greece’s colossal debt in the wake of its huge €86-billion bailout, but the short-term measures, while welcome, fall short of what the IMF has said is needed.
The fund has remained adamant it will not participate in another loan program unless the elements, including debt sustainability and the fiscal reforms needed to achieve the surplus target, are credible.
In their blog the officials repeated that “Greece’s debt is highly unsustainable and no amount of structural reforms will make it sustainable again without significant debt relief.”
The IMF played a major part in two earlier rescues for Greece, but balked at the third one for €86 billion in 2015 because it said Athens would not get back on its feet unless its mountain of debt were cut outright.
The EU has maintained a hardline stance on debt relief, led by Germany’s powerful finance minister, Wolfgang Schäuble as key elections approach next year in Germany and the Netherlands, where bailout fatigue is running rife with voters.