US ‘could have forced a haircut,’ says former IMF deputy director for Europe

“The fundamental reason why the Greek crisis lasted so long was the extreme level of austerity that was imposed.” That is the verdict of Ashoka Mody, visiting professor in International Economic Policy at Princeton University, a former deputy director of the International Monetary Fund’s European Department and one of the most eloquent critics of the policies of the troika in Greece and elsewhere.

Mody, who recently published a long-form version of these critiques in his book “EuroTragedy: A Drama in Nine Acts” (Oxford University Press), spoke to Kathimerini about the Greek crisis and those to blame for it.

We began by discussing what many consider the original sin of the bailout period: the decision not to restructure Greece’s debt in May 2010. What should the IMF have done?

“It should have insisted, it should have made the restructuring a condition of its participation,” the Indian-born economist said, mentioning that the staff report all but admitted the debt was unsustainable and that Dominique Strauss-Kahn later said he was in favor of debt relief.

“The reason it didn’t happen was the ideological opposition of the European Central Bank – in this case supported by the US Treasury. Strauss-Kahn did not want to offend either the Americans or the Europeans. The stance of the US Treasury was critical – if its representative on the Executive Board had come out in favor of a restructuring, it would have happened. Instead, it sided completely with the European viewpoint – the Treasury secretary, Tim Geithner, believed that there should never be a restructuring in the midst of a crisis.”

Regarding the argument that the problem in Greece (compared with other bailout countries) was there was no ownership of reforms, Mody said: “It is indeed the case that IMF programs only succeed when there is ownership. The question is what were Greeks asked to own. The arithmetic of austerity was relentless, cruel. Whatever the Greeks did, with austerity on such a scale they could not have escaped the collapse in gross domestic product. And then things became even worse, because the recession led to targets being missed, which led to more measures! The IMF published studies at the time showing what a terrible idea it was to impose further austerity in a recession, how it worsens the debt-to-GDP ratio. Yet the IMF kept doing it in Greece, ignoring all its internal studies!”

Mody believes that Greece’s fiscal asphyxiation hurt the economy in other ways, too. Through the hysteresis effect, it hurt the long-term prospects of the economy; in addition, it undermined the possibility of forming a coalition for reform (“it’s very hard” to carry out structural reform in a state of economic free-fall, he pointed out). He is also critical of the reform mix: “A lot of the measures were about weakening labor. Here, too, there were many IMF studies showing what a terrible idea it is to cut wages during a recession. These, too, were ignored.”

2015 and all that

The conversation turned to 2015. How does he think the creditors should have handled SYRIZA differently? “Look, even before SYRIZA came to power, Wolfgang Schaeuble said that elections do not matter. On January 31, 2015, six days after the election, Erkki Liikanen, the head of the Finnish central bank, says that if the new government does not accept the program, the ECB will cut liquidity support for Greek banks. Four days later, the ECB withdraws the waiver [which allowed the banks to borrow cheaply from it, using Greek government bonds as collateral]. And in June, the Europeans close down the banks. What was the basic demand of SYRIZA? To tie debt repayments to GDP and so reduce the level of austerity. Any good economist will let you that was a very reasonable starting point for the negotiation.”

The creditors, he insisted, could have ignored the rest of the party’s program – the reversal of structural reforms – and accepted this basic demand. But “instead of giving the new government some breathing space, they adopted the logic of ultimatums, of ‘take it or leave it.’”