In a blogpost, IMF economist Obstfeldt and Director of the IMF's European Department Thomsen have reacted to criticism that the IMF would be demanding more fiscal austerity for Greece, in particular for making this a condition for urgently needed debt relief. According to Obstfeldt and Thomsen, these allegations are not true. For the IMF a primary fiscal surplus of 1.5 percent of GDP by 2018 would be sufficient (as opposed to the 3.5 percent agreed between Greece and its partners). If a higher primarcy surplus is agreed, the measures should however be credible.
Highlights from the post include:
– the IMF is critiical of the agreement between Greece and is European partners in the context of the ESM program to push the Greek economy to a primary fiscal surplus of 3.5 percent by 2018, warning that this would generate a degree of austerity that could prevent the nascent recovery from taking hold;
– the IMF estimates that the measures in the ESM program will deliver a surplus of only 1.5 percent of GDP, and argues that this would be enough for the IMF to support a program. It did not call for additional measures to achieve a higher surplus;
– if a short-term surplus target of 3.5 percent of GDP is agreed, however, there needs to be a credible plan how to push the surplus beyond 1.5 percent of GDP, requiring significant additional measures that are not yet in place. Also, this credibility requires that these additional measures are legislated upfront to leave no doubt about Greece’s political resolve to overcome the resistance from vested interests that have hampered program implementation in the past;
– the IMF is critical of the 2017 Greek budget, as it fails to address two key issues: an income tax regime that exempts more than half of households from any obligation and an extremely generous pension system that costs the budget nearly 11 percent;