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The IMF's Road to Ruin?
Published in Pension Pulse.
Mark
Weisbrot writes in counterpunch on the IMF's Road to Ruin:
Latvia has
experienced the worst two-year economic downturn on record, losing more
than 25 percent of GDP. It is projected to shrink further during the
first half of this year, before beginning a slow recovery, in which the
International Monetary Fund (IMF) projects that it will not reach even
its 2006 level of output by 2015 – nine years later.
With 22 percent unemployment, a
sharp increase in emigration and cuts to education funding that will
cause long-term damage, the social costs of this trajectory are also
high.
By keeping its currency pegged to the
euro, the government gives up the opportunity to allow a depreciation
that would stimulate growth by improving the trade balance. But even
more importantly, maintaining the peg means that Latvia cannot use
expansionary monetary policy, or expansionary fiscal policy, to get out
of recession. (The United States has used both: in addition to its
fiscal stimulus and cutting interest rates to near zero, it has created
more than 1.5 trillion dollars since the recession began).
Some who believe that doing the opposite of what rich
countries do – i.e. pro-cyclical policies -- can work point to
neighboring Estonia as a success story. Estonia has kept its currency
pegged to the Euro, and like Latvia is trying to accomplish an “internal
devaluation.” In other words, with a deep enough recession and
sufficient unemployment, wages and prices can be pushed down. In theory
this would allow the economy to become competitive again, even while
keeping the (nominal) exchange rate fixed.
But
the cost to Estonia has been almost as high as in Latvia. The economy
has shrunk by nearly 20 percent. Unemployment has shot up from about 2
percent to 15.5 percent. And recovery is expected to be painfully slow:
the IMF projects that the economy will grow by just 0.8 percent this
year. Amazingly, by 2015 Estonia is projected to still be less welloff
than it was in 2007. This is an enormous cost in terms of lost actual
and potential output, as well as the social costs associated with high
long-term unemployment that will accompany this slow recovery. And
despite the economic collapse and a sharp drop in wages, Estonia’s real
effective exchange rate was the same at the end of last year as it was
at the beginning of 2008 – in other words, no “internal devaluation”
had occurred.
Yet Estonia is being held up as a
positive example, even used to attack economists who have criticized
pro-cyclical policies in Latvia. The reason is that Estonia has not had
the swelling deficit and debt problems that Latvia has had in the
downturn. Its public debt of 7 percent of GDP is a small fraction of
the EU average of 79 percent, and its budget deficit for 2009 was just
1.7 percent of GDP. It is therefore on its way to join the Euro zone,
perhaps adopting the Euro at the beginning of next year.
How did Estonia manage to avoid a large increase in its
debt during this severe downturn? First, the government had accumulated
assets during the expansion, amounting to some 12 percent of GDP; and
it was also running a budget surplus when the recession hit. And it has
received quite a bit in grants from the European Union: In 2010, the
IMF projects an enormous 8.3 percent of GDP in grants, with 6.7 percent
of GDP the prior year.
Greece, unfortunately, is not being offered any grants
from the European Union or the IMF. Their plan for Greece is all about
pain and punishment. And with a public debt of 115 percent of GDP and a
budget deficit of 13.6 percent, Greece will be forced to make spending
cuts that will not only have drastic social consequences but will
almost certainly plunge the country deeper into recession.
This is a train going in the wrong direction, and once
you go down this track there is no telling where the end will be.
Greece – like Latvia and Estonia – will be at the mercy of external
events to rescue its economy. A rapid, robust rebound in the European
Union – which nobody is projecting – could lift these countries out of
their slump with a huge boost in demand for their exports, and capital
inflows as in the bubble years. Or not: Western European banks still
have hundreds of billions of bad loans to Central and Eastern Europe
from the bubble years. Some big shoes could still drop that would
depress regional growth even below the slow recovery that is projected
for the Euro zone. Germany, which has been dependent on exports for all
of its growth from 2002-2007, could continue to soak up the regional
trade benefits of a Euro zone and/or world recovery.
No matter how you slice it,
these 19th-century-brutal pro-cyclical policies don’t make sense. They
are also grossly unfair, placing the burden of adjustment most squarely
on poor and working people. I would not wish Estonia’s “success” on
any population, simply because they avoided a debt run-up and are on
track to join the Euro. They may find, like Greece – as well as Spain,
Ireland, Portugal and Italy – that the costs of adopting a currency
that is overvalued for a country’s level of productivity are
potentially quite high over the long run, even after these economies
eventually recover.
The European Union and the
IMF have the money and the ability to engineer a recovery based on
counter-cyclical policies in Greece as well as the Baltic states. If it
involves a debt restructuring – or even a haircut for the bondholders -
so be it. No government should accept policies that tell them they
must bleed their economy for an indeterminate time before it can
recover.
But the problem is the
bondholders do not want haircuts or debt restructuring. So Greece and
other "PIIGS" are facing the stark reality of the IMF's wrath.
In
my
last comment, I wrote the revolts going on in Greece will likely
spread throughout Europe, threatening the very existence of the
Eurozone. While there is no question that Greece needs to reform its tax
system, pension system, and public sector, the reality is that
austerity measures will impose undue hardship on workers who had nothing
to do with engineering the global credit crisis.
As clashes
between protestors and police erupt in Greece in a May Day mayhem, I can't help
thinking that maybe it's time for Greece to default, negotiate a haircut
with bondholders, and explore other options with Russia and China.
Forget Europe and Germany, solidify your ties with China to work on
alternative energy and developing your ports as a hub for Chinese goods
into Europe. With Russia, Greece can explore developing the oil reserves
in the Aegean.
Tough economic times require tough political
decisions. It's time for Greece to explore all options and stop
being Germany's and the IMF's whipping boy. If the they don't explore
all alternatives, the IMF's road to ruin is right around the corner.
Apart from the videos below, take the time to watch this documentary, The Bankrupt State -
Greece.
»
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My sister in Crete tells me that was frustrates Greeks the most is that the elite have already transferred their money out of Greece, buying up real estate in London, shoving it in Swiss, Cypriot, and even Bulgarian banks. Greek workers were getting peanuts in wages and now their double payments in Christmas and Easter were cut off by the IMF. She tells me that what worries her the most is that five or ten years down the road, nothing will change. The Greek government will continue to be corrupt and workers will keep getting hammered. And she tells me the Germans are having a field day taking pictures of "lazy" Greeks at coffee shops or running with stories of a pensioner collecting 3,500 euros a month pension (very rare indeed, most get less than 600 euros a month). "What are we suppose to do, stop living to make Germans happy? They already own half of Greece, now they want the other half".
Corruption is too delicate a notion to be useful.
Is it corruption to move your assets outside the eye of a storm?
Besides, while governing (elected)people are among people who moved their assets, are they the only ones?
If the Greeks stop living, it will free resources for others to absorb through debt.
A large segment of the first world has a vested interest in this. Squeezing the guy at the bottom of the line in the world is history. This bottom has been yielding as much as possible. Feeding the machine requires to target higher in the line. Greek workers might be a satisfying target.
So you say the Greek government is corrupt and will stay corrupt forever. Well, then Greece has nothing to do in EU, if greeks are unable to put their house in order. Then Greece needs a revolution. OR, as we now live in 21.century, there´s also a more civilised way how to replace the government. It´s called democracy. You know it´s a form of governance in which citizens FREELY elect their leaders in elections. Democracy was invented two and a half thousand years ago in a country called .... hmmm....let me see .....Oh!
Your sister's story is the same story told and retold by anyone whose rights and livelihood were stripped by the governing authorities promising them precisely those things, USA included. And, unfortunately, not all workers are in the same situation. Consider how Government workers and Unions get paid ABOVE average wages for private citizens. This is a recipe for disaster, and the lack of foresight by most citizens and politicians (especially with Greece demonstrating the outcome of such a system) will only ensure the same tragic outcome.
Nihilarian,
So true, you see things the same way I see them. When the day of reckoning comes here, people are going to be shocked that we were just as vulnerable as Greece.
Except our entire society is based on the canard "It can't happen here". You could probably count the number of people in the US learning a lesson from all this on one hand.
What do you do when foreign power tell you what to do and let you consumer what's left of your wealth?
You revolt.
I think this is that time that we'll see massive global unrest kicking in when all the tricks in the world won't change water into wine anymore.
http://www.youtube.com/watch?v=t5USankwRQE
One more thing: <With 22% unemployment, a sharp increase in emigration and cuts to education funding that will cause long-term damage, the social costs of this trajectory are also high.>
These are political issues the Greek society utilized for a long time:
- High unemployment -- Society and politicians are paying people for doing nothing. This must be stopped.
- High immigration -- "Cheap" immigration labor must be stopped also. Greek people must start to work instead of enjoying somebody else labor and money.
Conclusion:
- It is about time for Greece and its people to start working instead of using somebody else money and labor. It is hard but there are no other alternatives. As for Greece politicians and union leaders, their socialist Ponzi game is over.
- Finally, civil unrest is a natural, beneficial, and quite often necessary remedy to remove at least some corrupt politicians from power.
Saying the greeks don't work and are leaches sounds pretty racist to me.
It's not the fold of the people that they don't have work. What would you do when there are no jobs, the only thing that helps you pay for food for your children and ables you to have a roof over your head and suddenly you don't get anything anymore?
If my children would be hungry, and I would see you with food in your hands, I'd shoot you, just to feed them one more day.
"If my children would be hungry, and I would see you with food in your hands, I'd shoot you, just to feed them one more day."
Did the idea of potentially participating in a civilized exchange of value for value even cross your mind? Something like, oh I don't know, "Can I do some work for you in exchange for some food?"
If it is alright for you to kill someone to feed your family, then it must also be OK for someone else to kill your family to feed theirs, no?
When a weak argument is about to be offered, it is always best to drum up the race card.
I am relatively certain that the Greeks can feed themselves, but they cannot continue forever spending more than they earn. What's racist in that ?
By the way, if your children were hungry and I had food in my hands, I would offer it to them. You do not need a gun to get food from your neighbor.
<If my children would be hungry, and I would see you with food in your hands, I'd shoot you, just to feed them one more day.>
Well, nobody tried to do it in communist Soviet Union or China. Why? Because people like you were brutalized and terrorized to a point when they were afraid of their own shadow. The same is true in the most of 3rd world countries.
If it involves a debt restructuring – or even a haircut for the bondholders - so be it. No government should accept policies that tell them they must bleed their economy for an indeterminate time before it can recover.
This too is a consequence of ZIRP. Let me explain. Zero interest rate policy and asset inflation worldwide date to 1989, when the Jap market fell, and they cut rates to 1% or some such nonsense. So what?
My two favorite restaurants were started by guys who knew squat about restaurants. They had enough money for a couple of kegs of beer and a few pounds of barbeque. To start up in the same town now would cost one million, more or less. How can that happen?
When government is small and commercial space is almost free, new businesses will grow like weeds. Some will fail, but some will not, and wages will be decent because there are always options.
When land is expensive and the government is always in your face you still have a choice. You can work for da man or your sorry ass can starve. See how simple this is? Now if you would all just make me the kaiser....
Never mind, my cabernet is calling.
Cheers.
IMF along with all other GLOBAL institutions need to be shut down
I really don't understand these people who have this
big of an ego and pocketbook. It just doesn't make sense
There are too many conflicting factors. IMF does not act in the interest of the countries they lend to, Greek government is corrupt, citizens are spoiled and do not want to accept any consequences not that I disagree with protesting. Something has to give.
Leo Greece is but the forerunner of what the future will be. Either live within your means or borrow/inflate (meaning future taxation or future borrowing). Ultimately the economic train hits a very hard wall. Greek civil servants are the European equivalent of Canadian civil servants. Overpaid, underworked, and overpensioned. Retire at 50 to 55 and then work for the government under contract. Its a great system for the leeches, but the warm body is getting colder, and the blood is running dry. Sadly, Virginia, there is no Santa Claus. Mom and Dad went to work for the presents under the Christmas tree.
The IMF is setting a very dangerous precedent with these austerity measures. They have no choice but to use the same policy on every country that comes to them for help. Makes you wonder what politicians in Spain, Portugal, Italy, etc. are thinking when they see the situation worsen in Greece. If I was a European politician with a phoney-baloney job (hat tip Blazing Saddles) watching this unfold, I would start leaning towards taking a belligerent stance to the EU and strongly consider default. Who wants to be known as the guy (or gal) who signed their country up for a decade of hardship.
Same policy? C'me on. Propaganda is fine when people have a certain potential of authority and limited time of discussion to get away with it.
Package has been accepted. IMF is big on selling national assets to private sectors.
Where is their trademark in Greece's plan?
<I can't help thinking that maybe it's time for Greece to default, negotiate a haircut with bondholders, and explore other options with Russia and China. Forget Europe and Germany, solidify your ties with China to work on alternative energy and developing your ports as a hub for Chinese goods into Europe. With Russia, Greece can explore developing the oil reserves in the Aegean.>
The only problem with this approach is that Greek ruling socialistic elite keeps all its loot in EU banks and does not give a shit about Greece and its people.
Hey Caconhma
I love your idea ! Not ! Have a wild party then tell the liquor store and your coke dealer to take a hike. That will help your future ability to hold parties with other peoples money !!!
How about, roll up your sleeves, save your money and invest in your own Aegean oil fields.
Fiscal reality seems to have escaped the teaching of the children of Hellas. Perhaps Alexander the Great #2 can amass an army and plunder the Middle East- that would seem a little better alternative to becoming the joke/lapdog of Russia or China.
The concept of debt free living has completely evaporated from the consciousness of most people. The entire fiat money / debt slavery lifestyle has taken over the world to the point that most policy makers cannot even fathom a life of freedom.
Would we even been discussing Greece or any of this if they had a responsible fiscal policy?
You reap what you sow, more than you sow, later than you sow.
You're right about fiat money warping people and their perceptions.
I have seen people shrug and say, "Well, it's only money." I have never seen anyone shrug and say, "Well, it's only gold."
But then, isn't that what the governments want? People will hand over fiat paper far more easily than they'd hand over gold. And when you job is to confiscate the fruits of one person's labor to give to another, the flaws in fiat money become features, not bugs.
Greece cannot have responsible economic polices. Socialism is only capable of promising but never can deliver always driving in a long-run its economies to ruins.
Rest assured the world MSM and Obama admin. will spin Greece,Spain, Ireland,California,NY, etc. as failures of capitalism, and the only solution is more socialism.
How do I get off this planet?
So what? Debt restructuring isn't what is going to solve Greece's problem, which is engaging in more spending than it can afford. Debt restructuring is like taking a tylenol to bring down a fever caused by cancer. You might feel better temporarily, but in the mean time, the underlying problem will only get worse and far more deadly. And until that fundamental problem is solved, no amount of 'debt restructuring' will solve a thing. Even if haircuts are granted, Greece must tighten its fiscal spending (which is the reason behind the riots) so that they are not back in the same situation of a massive debt load with no means to repay it.
Besides, who cares what bondholders want? If there's 2 apples in a basket, and the bondholders are demanding 7, basic math implies that what they want ain't what they gonna get.
There are no innocents here. Greece and others got a free ride off the richer N. Europeans, and it lasted a good long while. The Northern Europeans got their socialist, expansionist vanity stroked by creating a faux super-power made up of countries that should have never been drafted into the major leagues. If it wasn't happening now, and to us, it would all be a farce. Of course, it is just a farce, and human nature and folly. Whatever, this too shall pass.
There are many people who are jealous of Norway's socialism and their success due to their wealth (oil).
Is it Norway's fault that they are well ruled and have access to North Sea oil? I would suspect part of their prosperity has to do with the lack of white collar criminals as they design their system to be difficult to game, but that's just my opinion.
by pan-the-ist
If you're tempted to admire any Western country, just find some of the liberals within that society to tell you how horrible they have it.
Police brutality and racism in Norway:
http://www.youtube.com/watch?v=SW0vUnIOnTg&NR=1
redfoxbennaton Norway is the most racism filled country in the world.
MagnitudePerson Ignore averyone posting here except me. Its 100& Bullshit like the belwo me siad! FUCK CRPAITALISM! FUCK POLICE SHIT, GOT ARRESTED FOR NO REASONS AT ALL. Fucknig retarded norwegian fucks. CrapShitvatives
Lol, indeed this is true. There are probably conservatives in Switzerland who complain because they markets there aren't free enough :)
Australia is another good example of a well run 'socialist' country.
I like Norway too and they've done a great job managing their Petreloeum Fund.
Is it just me of is this piece a volte face by LK?
Greece just has to live within its means to recover, and it has to get out of the Euro to do that, so its holiday costs for its tourists are once again reasonable. For LK to say "the revolts going on in Greece will likely spread throughout Europe, threatening the very existence of the Eurozone" is wrong in a number of ways, quite apart from mis-understanding how the Northern European countries work socially:
1 The Euro is not the EU. If Greece and anyone else who wants to exist the Euro, so what? - apart from a few broken beaurocratic hearts in Brussels.
2 Once the southern countries get out of the Euro they will surge ahead as their exports once again become competitive and their politicians stop thinking they are big wheels and spending money they have not got.
3 In turn this will a year or two later scare the French who will also exit teh Euro at some point as their exports are crucified by good quality cheaper Italian and Spanish goods.
4 Thus, finally the Euro will become what, in fact, it always has been, the DMark plus a few minor German-zone-of-influence countries.
5 The EU will then formally revert to being what it in fact always has been: a free trade zone; and Europe will muddle along somehow, with its leaders mad dreams of a political union going down the same tube that Napoleon's went down 200 years ago.
Greece is nothing to do with this, any more than the canary manages the coalmine: saving the canary does not save the mine!
"If Greece and anyone else who wants to exist the Euro, so what?"
Easy to say, IF your debt isn't denominated IN EURO.
"2 Once the southern countries get out of the Euro they will surge ahead as their exports once again become competitive"
What exports? If they had any, they wouldn't be in this hole would they?
Well said Bokapita, and it reflects the facts on the ground.
I like this so much, that I'd like to see the disUnited States do it.
Our states, like the "countries' of Europe, dissolving the so-called union and recognizing that NO country of 500,000,000 diversified, multi-cultural, multi-racial, multi-lingual, polyglotted mishmash and pastiche can be as effectively governed as 51 separate states can.
Politicians who can't even manage their own 5 person family are full of poop to think that they can manage 500,000,000 of us.
Big pot for stuff like National Deef, that all states contribute to and some other necessaries more effectively handled at a national level, (NOT education, NOT national health insurance, etc.) and then the states are on their own.
The canary here is screaming like a banshee for this change.
dis United is crap.
If so many people want to say the Constitution is a living document then fine. The states should vote on which nation they want to join. The Progressives or New America. The Progressives can have their social state. The rest of us will give you everything in DC and start from the beginning. Keep your tax code. Keep your SS and Big Union mafias. Keep it all.
I wonder how many states outside of CA NY NJ VT MA will join you. New America.
You forgot IL.
Civil War temporarily answered some questions for the US. Like the rest of the world, we're not immune to time passing. I don't know about 50 sep. countries, but two or three 'aint out of the question. You'll prob.live to see it. I currently live in the People's Rep. of the North, but I'll end up in one of the other ones.
If the slavery-by-business-friendliness South wants another defeat, the free North will gladly deliver it.
I'm with you +++100 I want to see the disUnited States too.
The only thing National should be defending the borders..... AND THEY CAN'T E
EVEN DO THAT NOW..... it's time for decentralization.
It's time to bring accountability home here. The bailouts here
proved to me at long last that we are no longer in control
When 99% of the population is against and they vote for it
anyway..... this is when it is time to shut it down.
Thanks for your insight
Leo, why highlight that Greece is not getting any grants from the IMF? There is no mention of the tens of billions in transfer payments that EU countries gave Greece.
Greece is turning into a joke and every day is a strike. It's good to see that Greece is continuing to look for the easiest way out of their mess. All the power to them. By the way, pulling out of the EU likely negates the implied value of their ports. As far as oil in the Aegean, I ain't holding my breath.
I'm pleased that the Greeks have time to protest. I'm too busy working to support their bailout or I would be out protesting their bailout. The IMF must go or we're all screwed. They will ultimately have the greatest concentration of global wealth. That's the plan.
As we all know, in a "free market" bondholders would get haircuts, insolvent companies and countries would go bankrupt, and the putrid situation gets cleansed. In our twisted society, everybody gets a bailout on someone else's nickel. No wonder animal spirits abound.
Working to support their bailout? How?
Do you work in the commodity sector?
Do you work in expanding credits on software?
Where do you work to support their bailout?
It is hoped you are not in the US tax payers money or any tax payer money by the way thing because that is not tax money.
There IS no good ending to this. Now or later, through the EU or IMF or BRIC or KAOS or SPECTRE, Greece is well and truly fucked.
I am unsure about IMF running unselectively their policies. Time will tell but I am going for different standards on this one.
One feature in Greece is they dont have enough minorities.
Minorities, especially if visible, especially if wronged in the past by the majority, contribute to maintain domestic stability.
Beside offering a convenient scapegoat when in downturn, they keep the majority quiet. The majority lives in fear that an uprising against the government might be seen by minorities as an opportunity window to settle the score, close old books.
So the majority prefers to stay low.
Greece does not benefit from this effect, making it open to domestic unrest.
Getting chummy-chummy with Russia/China would be self marking for death.
Current greek government played nicely on this one. They pushed big boys to quarrel among themselves. China/Russia might have now a(nother) case of an offer repelled on other grounds that 'the best offer will win'
The game is growing tenser.