Truth Upside Down

The IMF says 1/ it favors a target for the primary surplus of 1.5 percent of GDP for Greece for 2018 and beyond. Claims to the contrary have the truth upside down.

But the IMF also requires measures to achieve targets of 3.5 percent of GDP for 2018 and beyond to be credible and to be legislated immediately.

Well, which is it?

The IMF says it is forced by the 2015 Greek-European deal into this self-contradictory position.

But that excuse makes no sense in the specific case of Greece. Because the IMF was not just created to oppose macro policies that are too loose, but also to oppose policies that are too tight. In general, it has plenty tools to force the issue on the former, but almost none, beyond pleading, to deal with the latter. This is the well-known issue of IMF policy asymmetry and global deflationary bias.

But in the unique case of Greece, now, the IMF has a powerful tool to resist over-tight policies. European creditors want formal full IMF involvement in their Greek program. So if the IMF views the policies as too tight, it can just say "no" to their request. That would force, at least, reconsideration of those over-tight policies.

And the global context is crying out for the IMF to play such a role. The rise of populist forces in many parts of Europe and elsewhere reflects, in part, over tight policies. These trends herald crisis, which the IMF was also founded to head off.

So one might imagine that the IMF would jump at this rare chance to be as hard on overtight as on overloose policies. That would reinforce its claim to be even-handed and forcefully signal broader concerns about the consequences of such policy errors.

But no. Instead it has taken this self-contradictory "it wasn't me" line on Greece.

This is a fundamental abrogation of its founding purpose. And the broader populist wave is a warning of the dire consequences when such institutions abrogate their founding purposes.

The IMF failure does not end there. Messrs. Thomsen and Obstfeld say pensions, the lack of targeted unemployment benefits, and the skewed burden of personal taxation impede Greek growth potential and must be changed ("modernized").

But neither they, nor other IMF staff, nor anyone else has shown this. Pension spending may be out of line with European averages, but total Greek government spending is not. So if Greeks choose to channel their social programs through the elderly--from them through intra household transfers--it is an empirical issue if that produces more or less effective targeting in the Greek case than if those benefits were each channelled directly by government. Yet no evidence is provided. Similarly for the claims of the effects of the burden of personal taxation.

Such technically ill-grounded IMF requirements reflect power without accountability.

The only agency with ability to correct these long-standing shortcomings in the IMF work on Greece is the US Government. That is because of its role on the IMF Executive Board where, after the European block of 40 percent or so, it is the second shareholder at some 18 percent.

The incoming Trump administration has so far shown no focus on such issues arising in international institutions.

But Greece scores well on NATO military spending, Mr. Trump is disposed to be scornful of international institutions, and Mr. Mnuchin, Treasury Secretary designate, is a quick study. So Greece has cards to play in Washington DC. The Government should be giving close attention to how best to make its case to that audience, now.

1/ https://blog-imfdirect.imf.org/2016/12/12/the-imf-is-not-asking-greece-for-more-austerity/