International Monetary Fund misjudged austerity impact on Greece

IMF admits it misjudged impact of austerity on Greece

The International Monetary Fund has admitted that it underestimated the impact of austerity on Greece, as it blamed a lack of government action on reforms and the impact of social unrest for the dire state of the economy.

By Szu Ping Chan4:39PM BST 23 Aug 2013CommentsComments

The IMF admitted for a second time in almost as many months that it had misjudged the effect of austerity on a country that has been mired in recession for six years.

In June, the IMF said that it had miscalculated the so-called “fiscal multiplier”, or effect that adding or subtracting a euro of government spending would have on the Greek economy.

However, in a new working paper, the Fund said the errors were less closely linked to fiscal multipliers than first thought. “A closer look … suggests that GDP forecast errors for Greece were due more to over-optimism on potential growth than to underestimating fiscal multipliers,” it said.

The report, which examines the impact of IMF-backed economic reform programs in several countries, said the collapse in Greek output reflected “weaker than anticipated program implementation and payoffs from reform, political and social dislocation”.

Meanwhile, German finance minister Wolfgang Schaeuble repeated his warning that Greece would need a third bail-out, but said that any fresh aid would not involve another debt writedown.

Mr Schaeuble said that a second “haircut”, involving creditors taking a writedown on their holdings of Greek debt, would be “extremely dangerous” and could “destabilise” the whole eurozone.

Data on Friday confirmed that Germany grew by 0.7pc in the second quarter, the fastest pace in more than a year, amid a pick-up in household and government spending. Official data also showed that Germany recorded a budget surplus of €8.5bn (£7.3bn) in the first half of the year, as rising tax income boosted government finances.

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