Greece’s Hellenic Parliament building.
Greece’s Hellenic Parliament building.

Greece Will Never Recover Under Europe’s Brutal Austerity Plans

Only through a “Herculean effort” will Athens be able to meet the demands of its creditors, and through slashing spending in vital services that will derail Greece’s long-term prospects

Greece Will Never Recover Under Europe’s Brutal Austerity Plans

The debt-laden country has been set ambitious economic targets by the European Commission and countries such as Germany, which are not “credible” and will hamper growth, according to the International Monetary Fund.
Only through a “Herculean effort” will Athens be able to meet the demands of its creditors, and through slashing spending in vital services that will derail Greece’s long-term prospects, said the fund, news outlets reported.
The Washington-based organization fiercely denied it had supported plans for Greece to create a surplus of 3.5% under the European Stability Mechanism program, which would require staunch austerity.
Instead the IMF revealed it had argued for a much lower target of 1.5%, along with economic reforms, which would help the economy’s long-term growth.
In a stinging open blog post, the IMF’s Maurice Obstfeld and Poul M. Thomsen wrote: “The IMF is not demanding more austerity. 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.
“It should be obvious that pushing the budget to a surplus of 3.5% of GDP will take an even larger toll on growth. It will reduce demand in the short run—which is why we would in any case not recommend increasing the surplus above 1.5% of GDP until the recovery has taken better hold.”
The pair added: “An open-ended long-term commitment to very high surpluses is simply not credible.”

  Need for Modernization
The IMF said the budget plan agreed between Greece and its creditors means Athens is still spending far too much on pensions and not asking enough people to pay tax. “Greece’s economy needs far-reaching modernization”, the IMF said.
But instead, the government has committed to meet targets by cutting investment in vital services, which will prevent the economic recovery.
Obstfeld and Thomsen said: “Greece has resorted to deep cuts in investment and so-called discretionary spending.
“It has done so to such an extent that decaying infrastructure is hampering growth and the delivery of basic public services such as transportation and health care is being compromised. We think that these cuts have already gone too far, but the ESM program assumes even more of them.
“Perhaps through a Herculean effort Greece could manage the spending cuts needed to achieve a 3.5% of GDP deficit in the short run.
“But experience has shown that they cannot be sustained and are inconsistent with Greece’s ambitious long-term growth target.”
The IMF also reiterated calls for Greek debt relief to make the burden sustainable for the economy and future growth.
  Harmful to Growth
At the heart of the split is a deep-rooted belief in the IMF that budget surplus targets set for Greece under the terms of last year’s bailout deal are unrealistically tough and harmful to growth. The fund also sees an urgent need for a more comprehensive reform of the country’s income tax and pensions systems to put them on a sound footing.
Both claims are challenged by European Commission bailout monitors. They see the IMF assessment as economically pessimistic and dismissive of reforms that Greece has carried out so far.
The issue of IMF participation in the program remains crucial for Germany and Finland, where parliamentary support for the bailout is fragile. The fund is deemed to lend the bailout economic credibility.
In an indication of the difficult talks to come, the IMF officials said that the eurozone would have to be much more specific about how long Greece must maintain a surplus of 3.5% of gross domestic product that it is supposed to reach in 2018.
For the moment, the program documents only say that Greece must stick to it ‘over the medium term’.
“An open-ended long-term commitment to very high surpluses is simply not credible,” the IMF officials said.
The IMF is also warning that if the eurozone ignores its advice to lower the target, then Greece must legislate additional policy measures ‘upfront’ so that it can prove the surplus will be achieved.

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