The consequences of Greek austerity (Photo: Getty)
Nobody has taken responsibility for the disastrous errors made by the
EU-IMF Troika in Greece, where youth unemployment has just reached
58.3pc.
Nobody has resigned, or missed a day’s pay, or faced any kind of
censure from an elected body, despite the withering indictment just
issued by the IMF.
Worse yet, the basic conceptual policy errors that led to this tragic episode have not been fully corrected.
With a little trimming here and there, the eurozone is sticking to
the same mix of self-defeating contractionary policies that have tipped
the region back into a double-dip recession, with seven quarters in a
row of falling GDP, soaring unemployment, and an ever starker divergence
with the United States.
Just to recap what our man Bruno Waterfield reported from Brussels,
the IMF’s mea culpa admits that the Troika sacrificed Greece to save the euro.
It completely misjudged the ferocity of the downward spiral caused by
austerity a l’outrance, and then blamed the victim by pretending that
Greece was failing to comply with the terms.
The Troika recoiled from the standard IMF policy of debt
restructuring for Greece in 2010 because it was “politically difficult”
for countries (France? Germany?) whose banks held Greek bonds.
The report said the terms of the rescue violated three of the IMF’s
four key rules for lending to insolvent countries, no small matter given
that it was the biggest loan the Fund has ever made in proportion to a
member’s quota, and given that staff were “unable to vouch that public
debt was sustainable”.
It admitted that the 2010 package was a “holding operation” that
“gave the euro area time to build a firewall to protect other vulnerable
members and averted potentially severe effects on the global economy”.
The European Commission defended itself yesterday, saying a debt
restructuring in 2010 would have caused havoc in the bond markets and
virulent contagion. This is true, but what kind of a defence is that?
Yes, everybody feared a chain-reaction of sovereign defaults reaching
Italy and Spain, but this was entirely because the ECB was recklessly
refusing to carry out its responsibility as a lender of last resort, the
ultimate purpose of any central bank. In doing so, it was endangering
the entire global financial system.
You can trace this paralysis to Maastricht and the nature of the ECB
mandate, but as the Draghi (OMT) backstop for Italy and Spain has since
demonstrated, what it really showed was that a lot of ECB governors were
out of their depth, or pursuing naked national agendas, or both, and
hiding behind what are in reality very elastic treaty clauses)
The IMF makes it crystal clear that the EU institutions and the
leaders of EMU countries (still refusing to face up to the implications
of EMU, or admit to their own voters that monetary union costs real
money) were the chief villains in this saga.
What we see is a near perfect exhibit of what is wrong with the
European Project. There is no mechanism of accountability. The buck
stops nowhere.
I don’t wish to pick on Economics Commissioner Olli Rehn, although
one’s patience runs out after listening to the Commission’s retort that
the IMF is “plainly wrong”.
Mr Rehn is a decent man, with an impossible task, carrying
responsibility without power. The politicians of the northern EMU states
and the ECB are chiefly to blame.
I wrote at the time that Germany’s Wolfgang Schauble crossed a line
by threatening to eject Greece from the euro and persistently vilifying
the Greeks for failure to comply, when the essential failure was the
policy itself. Greece kept missing deficit targets because the economy
was collapsing, causing tax revenues to shrink.
Yet Mr Rehn is the titular official in charge. The Troika is “his”
baby. If he were the finance minister of a democratic state he would
surely have to resign after such blistering demolition of his tenure.
The fact that nobody ever resigns for botched policies in the EU
system (Pace, the Santer Commission: the exception that proves the rule)
should not deter Mr Rehn from falling on his sword from a high sense of
honour. Such a gesture would clear the air, and mark a recognition that
the policy formulae of EMU must be swept away to allow for recovery.
His director-general of economic and monetary affairs, Marco Butti,
has admitted that the fiscal multiplier is higher than normal in a
countries during a region-wide slump where the financial system has
partially broken down and interest rates are near zero, and therefore
that fiscal tightening does more economic damage.
But he admits it only in hindsight. The Commission now argues that
the return to calm after the Draghi `Put’ has lowered the multiplier
again, so there is no real need to change policy (other than letting the
fiscal stabilizers do their work, avoiding the mistake of yet further
tightening to chase missed deficit targets)
If no such resignation comes from Commissioner Rehn, we know the Rehn
of Terror will go on. The regime will persist in destructive folly,
adding 100,000 people to the jobless rolls each month.
Just a reminder of the scale of error, which
I wrote about in this blog last year.
The Troika originally said that Greece’ economy would contract by
2.6pc in 2010 under the austerity regime, before recovering with growth
of 1.1pc in 2011, and 2.1pc in 2012.
In fact, Greek GDP remained in an unbroken free-fall. It did not grow
in either year. It contracted a further 7.1pc in 2011, 6.4pc in 2012.
Roughly speaking, the Troika misjudged the scale of economic decline
over three years by 12pc of GDP. The total decline will be around 25pc,
surely a Great Depression.
Don’t tell it was hard to foresee. The Greek Labour Institute and the
think tank IOVE produced very accurate forecasts. The truth is that the
Troika’s ideology of “expansionary fiscal contraction” is bunk, and
doubly dangerous when compounded by tight money.
Like the Spartans, Thebans, and Thespians at the Pass of Thermopylae, the Greeks were sacrificed to buy time for the alliance.
Instead of applause, they were then vilified for their heroic efforts
by ill-informed and self-interested Dutch, Finnish, Austrian, and
German politicians. A squalid episode.
With
the United States having reached unprecedented levels of debt and no
end in sight, Europe close to widespread destabilization, and Japan now
having lost control of their bond market, it should be quite apparent
that there is no turning back.