The IMF's austerity plan hasn't worked. Greece's possible recovery is down to a construction programme boosting the economy.
It was nearly four years ago that the Greek government negotiated its agreement with the IMF for a harsh austerity programme that was ostensibly designed to resolve its budget problems. Many economists, when we saw the plan, knew immediately that Greece was beginning a long journey into darkness that would last for many years. This was not because the Greek government had lived beyond its means or lied about its fiscal deficit. These things could have been corrected without going through six or more years of recession. It was because of the "solution" itself.
Four years later, Greece is down by about a quarter of its pre-recession national income – one of the worst outcomes of a financial crisis in the past century, comparable to the worst downturn of the US's Great Depression. Unemployment has passed 27% and more than 58% for young people (under 25). There are fewer Greeks employed than there have been at any time in the past 33 years. And real public healthcare spending has been cut by more than 40%, at a time when people need the public health system more than ever.
The IMF is the subordinate partner in the "troika" (including the European Central Bank and the European commission) that has been calling the shots for the Greek economy these past four years, but it is the one in charge of putting numbers on the page. It repeatedly projected economic recoveries for 2011, 2012, and 2013 that did not materialise.
Now the IMF is projecting economic growth for 2014. But this time they are probably, finally, going to be right. It is vitally important that we understand why.
Last month the Greek parliament approved a stimulus programme involving highway construction that is quite large. According to the ministry of infrastructure, transport, and networks, total spending on this project will be €7.5bn over the next year and a half. This amounts to about 2.7% of GDP during this period. For comparison, the US federal stimulus that helped us out of our 2008-09 great recession (after subtracting the state governments' budget tightening) was less than 1% of GDP.
This stimulus will likely make the difference between growth and another year of recession. Most of the financing comes from EU grants, so it does not add to Greece's debt.
In other words, the Greek economy is going to grow this year because of a significant policy reversal. The austerity, or fiscal tightening, is basically coming to an end.
Why is this so important? Because the people who designed or supported the policy of the last four years will, when the Greek economy begins to recover, claim that the "austerity worked". But even the IMF's own analysis of the Greek economy refutes this claim. The austerity can only "work" (if one accepts the obscenely high human cost of it) if the massive unemployment drives down wages enough so that the economy becomes more competitive and can export its way out of the recession. The IMF projects a 20% decline in wages and salaries for 2010-2014; but this has not been enough to make Greek exports significantly more competitive, according to the fund's latest (July) review. Exports have remained weak and haven't come close to compensating for the fiscal tightening and reduced domestic private spending. The strategy of "internal devaluation" has not yet worked for Greece, nor – according to the IMF's data and analysis – for the eurozone as whole.
Of course, Greece is still far from out of the woods. With a debt-to-GDP ratio of 176% (it was about 115% when Greece began austerity), and facing high interest rates if it returns to market financing, there could be more crises and another debt restructuring ahead. And even if the return to growth this year convinces investors to put their money in Greece, it will take years for unemployment to reach humane levels.
That is why it is so important to understand the causes of Greece's return to growth, if it happens (it could still be derailed by adverse shocks). The human tragedy of the past five years in Europe, as well as the repeated financial crises and damage to the world economy caused by bad policy there, could have been avoided – as many economists have argued. But looking forward, the eurozone is still stuck near record levels of unemployment (12.1%), and how soon it returns to normal will depend on how quickly the European authorities are willing to reverse their policies for the region.