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Troika Solution Doesn’t Work

Troika Solution Doesn’t Work

Most of the success of IMF loans in developing countries is through increase in consumer spending, which was Keynes idea for economic growth and it has been criticized a great deal as high level of debt increases the risk of default and it is a burden on future generations. But, nevertheless the increase in consumption has multiplier effect and it will lead to higher GDP, as one person’s expense is another person’s income.  
The reason that the Troika (European Commission, European Central Bank and IMF) bailout didn’t work for Greece is mainly due to three factors. First, most if not all of the aid that Greece has received had been used to repay the previous loans accompanied by stimulus to lower effective demand. Part of the Greece crisis is due to lack of effective demand arising from unemployment crises that is not caused by structural factors that the Troika requires reform in. Second, Greece is an advanced country experiencing diminishing marginal returns in a currency union. Hence, even if the austerity were about to work the recovery would be very slow. Third, most European countries are experiencing deflation or are meeting their inflation targets. Hence, the real value of debt never decreases. This is a vicious cycle to increase the debt and help the creditors.
The striking fact is that defaults in Europe are the consequences of the 2007 financial crisis in the US and the solution to that crisis by the US government and international agencies such as the IMF has increased government spending. However, the solution to the Greece debt crises is austerity for the debt mostly accumulated from 2007.  Of course, the nature of the crises is different on so many levels but the Greece crisis is born out of 2007 crises and later on by the fear of a sovereign default because of above 100% debt-to-GDP ratio. High level of debt in turn is the consequence of corrupted government assisted with self-interested banks by legally disguising the debt and government fiscal irresponsibility in terms of high rate of tax evasion. Although many believe the primary reason for the need to borrow was Greece’s lack of competitiveness in the Eurozone and having no control over the interest rate, whatever the reason everyone is in denial for accepting the default and proceed with the remedy. Needless to say the solution to the crises is increase in fiscal stimulus and not the austerity that is designed to satisfy voters and tell the poorer countries in Europe “we do whatever it takes to save Europe”.
Following the order of events, the euro exit is just a response to the first contributor to the Greek crises. However, if it means to be a solution it must be by backward induction and starting to remove the austerity policies. Data speaks for the ineffectiveness of the Troika austerity measures. As compared to 2010, Greece now experiences 6.99% lower inflation rate accompanied by 12.9% higher unemployment rate in the light of lower negative economic growth. It would be fair to say that the motives of IMF and other banks by no means work for the benefit of all as assumed in economic models.

 

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