Written by John Lounsbury
The European Commission has established quite a track record in financial planning. If you follow their actions it can be summarized very briefly as: We will cut fiscal deficits to produce economic growth.
After five years of projections for economic growth in Greece and three years of severe imposed austerity it is not unreasonable to see how well these financial plans are working out. The planning is being directed by what is called the Troika: The European Commission, European Central Bank and the International Monetary Fund. The unanimity among the members of the Troika has broken down, as summarized in an excellent short article by Jesse Frederik in Follow the Money, Ruzie in de Troika (in Dutch).
The second graph in the Frederik article tells you all you need to know about how reducing deficits creates a turn-around in a contracting economy:
Click on graph for larger, readable image.
Here is what Frederik says:
Volgens de Financial Times geloven EU functionarissen dat het IMF te pessimistisch is over de Griekse economie. Het IMF verwacht dat de schuld/bbp ratio in 2020 nog op 150 procent van het bbp zal liggen, terwijl de EC gelooft dat deze net iets meer dan 140 procent zal bedragen. De Griekse economie kan sneller herstellen volgens de EC, zodat Griekenland met het nodige uitstel alsnog elke euro kan terugbetalen.Tot nog toe lijkt optimisme over de Griekse groei echter niet gerechtvaardigd. Bij elk nieuw Troika rapport vallen de groeiresultaten tegen. Dit terwijl de veronderstellingen over de Griekse groei cruciaal zijn voor de aanbevelingen van de Troika. In het vorige Troika rapport constateert de Troika bijvoorbeeld: ‘[T]his assessment leaves little to no margin in case policy implementation and economic and financial variables do not evolve in line with program assumptions and projections.’ Meer dan een half jaar later blijken de veronderstellingen en prognoses van de Troika er alsnog flink naast te zitten met alle consequenties vandien.
Summarized, he said that the Financial Times reported on 13 November that the EU (European Commission) is taking a more optimistic view of Greece's recovery to an improved debt to GDP ratio than is the IMF. He points out that the track record displayed in the graph clearly infers that the Troika directed actions have clearly not produced projected results, but have continually been increasingly wrong.
The kernel of the disagreement is that the IMF is now forecasting that every euro cut from the deficit will be reflected in an economic shinkage between 0.9 and 1.7 euros. The EC (and the Troika) have been using a shrinkage factor of 0.5 to 0.6. The performance data (black line in the graph) certainly does not support an economic shrinkge factor less than 1.
The cranking up of the austerity programs in late 2009 and 2010 coinicides with the reversal of what appeared to be the stabilization of Eurozone and EU unemployment in 2010, as shown in the following graph from Lars Y Syll:
Click on graph for larger image.
Last week the European Commission issued its autumn 2012 forecast, completed in July, which forecasts a return to positive GDP growth in 2013. What is the definition of insanity again?
For deeper research read:
- European Economic Forecast - Autumn 2012 (European Commission, 11 July 2012, released 07 November 2012.
- European Economic Forecast - Autumn 2011 (European Commission, July 2011)
Roger Erikson contributed research for this article.