How credible is the IMF’s plan for Greece?

Ben Chu

greek riot 150x150 How credible is the IMFs plan for Greece?Jens Weidmann, the president of the Bundesbank, gave an interview to the Financial Times this week in which he said this of Greece:

“Greece has agreed on an adjustment path. We finally need to implement what has been decided. Market turmoil comes from the fact that this implementation has been questioned – and not because the plan is not credible.”

But how credible is the IMF/EU plan for Greece really?

The table below contrasts the growth forecasts for Greece from the IMF’s report in July 2010 with the growth forecasts for Greece from the confidential “Troika” (ECB, IMF, EU) report from last month.

greek forecasts How credible is the IMFs plan for Greece?

There has been a considerable downward revision.  In the summer of 2010 the IMF expected Greece to be growing next year if it took all the fiscal medicine prescribed. But now Greece has taken that recommended medicine the Troika expects  a contraction of almost 3% on top of a massive 5.5% shrinkage next year.

In September, the IMF’s Bob Traa explained why the IMF got it wrong last year:

“The reason for the deeper-than-expected recession is fundamentally that investor and consumer confidence has not improved as hoped for when the program was launched.”

Traa argues that investor sentiment has not improved because Greece hasn’t reformed its economy enough:

“Reforms started strong, with comprehensive pension reforms and labor market reforms, but they have now become much more incremental. This means that Greece is still well away from the critical mass of reforms needed to transform the investment climate and to give a boost to the economy.”

No doubt Weidmann would concur.

Others, though, would argue that a 10% fiscal consolidation over three years in Greece, however necessary, was always going to plunge the country into a prolonged depression and that the IMF/EU expectation that this kind of fiscal shock therapy would result in a rapid rebound of private sector confidence was always barking mad.

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