Look at the chart below, and you will go a good way towards understanding why the problem with Greece has been allowed to get worse and worse (the proverbial “kicking the can down the road”) to the point where it may have become too late.
The chart shows the IMF’s growth projections for Greece in each of its successive World Economic Outlook (WEO) publications, along with the actual realizations. The WEO come out twice a year.
As the chart makes clear, the IMF’s growth projections were consistently too optimistic. Some of this was due no doubt to the fact that the Greek crisis caught the IMF – like most everyone – unprepared. But the IMF’s later projections, once the Greek economy entered an IMF program, are less easy to justify.
For example, in April 2010 the IMF’s growth projection for 2011 was a decline of 1.1 percent. The projected decline increased to 2.6 percent in October 2010, to 3 percent in April 2011, and to 5 percent in October 2011. Actual growth outcome for 2011 was -6.7 percent!
Now some of this can be chalked up to the fact that the Greeks did not deliver as much “structural reform” as they promised. But this is at best part of it. In fact, the programs were built on the assumption that there would be magical and large productivity gains from reforms such as liberalizing the professions and labor markets, which were never realized.
The fact is that technocrats at the IMF and elsewhere made it easier for politicians to delay the reckoning by putting together economic programs that didn’t hang together from day one. With optimistic growth projections, debt dynamics looked a lot better, which in turn made it look like sustainability was around the corner.
There is an important lesson here for the next round in Spain. Economists have to do a better and more honest job. When programs don’t add up, they have to say it loud and clear.