Greek crisis illustrates futility of IMF austerity approach

Greece is once again at the centre of an effort of the IMF and the European central bank to rescue its economy from the grip of a likely debt default and flight of capital. Unemployment, economic turmoil and political unrest including rioting in the streets of  Athens are now the preoccupations of the Greek government as it struggles to get a grip on the situation.Financial market analysts are now talking of an inevitable default and a 30 % haircut on sovereign debt bonds that the market holds. Regrettably the approach adopted by the ECB and the IMF to a further loan to bail-out the Government in order to prevent default on its bonds is very unlikely to work because it demands further politically and socially unacceptable excessive austerity from Greek citizens. The perversity of these austerity policies which do nothing to improve either the lives of citizens or improve the economy should by now be crystal clear. One does not lower unemployment or improve economic growth through austerity. Aggregate demand will simply shrink further and the capacity of the Greek economy to carry its debt load which is now in gross terms about 153 % of the GDP will be further imperilled.  When Greece entered the Euro at an exchange rate of 340.75 drachmas to the euro in 2001 its debt ratio to GDP was 103.7 %. It is now 153 %. Clearly belonging to the euro zone at this initial exchange rate has not worked to the advantage of the Greek economy. Unless the ECB changes its policies and the IMF abandons its austerity approach to rescuing troubled economies Greece would be better off leaving the euro and saving its citizens from further misery. The chart below gives the current 2011 gross debt to GDP ratio for  European countries group including euro members. It shows that every country  in the euro except for Finland has a debt to GDP ratio above the absurdly arbitrary Maastricht condition of 60 %.  Clearly despite the title (which is from the original chart and not mine) debt levels above 100 % are sustainable. Both Italy and Japan have operated with debt levels above this level for many years. Britain operated with debt levels above 160% for decades in the past(see James Macdonald, A free nation deep in debt: the financial roots of democracy,  N.Y.:Farrar, Straus and  Giroux, 2003, p. 355 and Harold Chorney, The Defict and Debt Management:An Alternative to Monetarism, Ottawa:Canadian Centre for Policy Alternatives, 1989, p.36.) and the U.S level exceeded 100 % for a period of time during and after the Second World War. It is time that Europe and the ECB and the IMF reformed their approach and recognized both economic history and economic reality.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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