In May 2010, when Greece signed on to its first IMF-EU program, it was assured by those organizations that the cost of austerity would be limited. It was also assured that the Greek government would be able to re-access the international capital market by 2012, if it followed the IMF prescription of draconian fiscal austerity and structural reform.
According to the IMF, any Greek recession would be short-lived and the country would be in recovery by the end of 2011. In the IMF’s assessment, there was absolutely no need for the Greek government to seek debt relief. And there was certainly no need for Greece to consider the possibility of reintroducing the drachma as a means to promote its external sector with a cheaper currency as an offset to severe budget tightening.
Greece is scheduled to hold parliamentary elections in April. Opinion polls suggest the electorate will deliver a resounding defeat to the present government.It is difficult to overstate how badly the Greeks were misled by the IMF and EU. Far from stabilizing, by end-2011 Greece’s GDP had declined by 16 percent from its 2008 peak. Over the same period, unemployment rose from around 7 percent to almost 21 percent, with over 50 percent of its youth unemployed. This makes Greece’s economic and social situation not dissimilar from that of the United States in the depth of the Great Depression in the 1930s. And by end-2011, there was every indication that the pace of Greece’s economic collapse was gaining momentum.
An important objective of the initial IMF-EU program was to spare Greece from the serious reputational consequences of having to renege on its international debt commitments. Yet as Greece’s economy collapsed and its tax base severely eroded, it became obvious to all that Greece was literally unable to service its international obligations on their original terms. After having been so adamant in 2010 that Greece did not need debt relief, the IMF was forced to swing to a position of supporting Greece’s use of retroactive collective action clauses to secure a 74 percent “voluntary” reduction in the present value of its private sector debt obligations.
When prescribing medication, most doctors do not double up on the dose when they observe that the medication is making the patient demonstrably more ill. Not so the IMF and the EU. Even with the Greek economy in freefall and the Greek banking system in tatters, the IMF is still insisting on severe fiscal austerity. Indeed, it is obligating the Greek government to commit to a further 5.5 percentage points of GDP in fiscal adjustment in 2013 and 2014. And it is still insisting that Greece attempt that degree of fiscal adjustment within the euro straitjacket. Even the IMF concedes that Greece’s economy is likely to contract by at least another 4.5 percent in 2012, with the risks to that forecast skewed clearly to the downside.
Greece is scheduled to hold parliamentary elections in April. Opinion polls suggest the electorate will deliver a resounding defeat to the present government. A newly elected Greek government should take a fresh look at Greece’s economic policy options. It is to be hoped that it will not be as resigned as was its predecessor to passively accepting the IMF’s policy prescriptions that hold out the unappealing offer of many years of a depressed economy and extraordinarily high unemployment rates.
Greece’s economic and social situation is not dissimilar from that of the United States in the depth of the Great Depression in the 1930s.Greece’s only chance of breaking out of its present downward economic spiral is to reintroduce its own currency. That would afford Greece the opportunity to quickly restore international competitiveness without going through many years of painful economic depression and deflation. By rapidly regaining international competitiveness, Greece would have the chance to revitalize its export and tourist sectors, which could serve as an indispensable offset to the large budget adjustment that Greece would still need to undertake.
Reintroducing the drachma should not be viewed as a panacea by a new Greek government and it is certainly not without its inflationary risks if it is mismanaged. If it is to succeed in restoring the Greek economy to health, the reintroduction of the drachma will need to be supported by sound budget and monetary policies and by considerable international financial support. However, the risks associated with reintroducing the drachma are worth taking when the alternative of hewing to the IMF line is all too likely to lead to a further deterioration of the Greek economy, with little prospect for recovery over at least the next five years.
Desmond Lachman is a resident fellow at the .