At long last, it appears the IMF will wash its hands of its sordid role in the Greek debt crisis.
When it does, the EMU will be free to mismanage the crisis on its own.
The results won’t be pretty because both Greece and the EMU live in a fairy tale world dominated by Germany.
Financial Times author Wolfgang Münchau claims Failure to Tell the Truth Imperils Greece and Europe.
In its latest survey of the Greek economy, the IMF states that “public debt has reached 179 percent [of gross domestic product] at end-2015, and is unsustainable”.
Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer.
They were particularly shocked that the IMF exposed the disagreement when it wrote that “some directors had different views on the fiscal path and debt sustainability”. These were the Europeans, who are now in a minority in the fund.
Once the Trump administration sends its representatives to the IMF board, expect the climate to become even more hostile. My expectation is that the IMF will ultimately pull out of the Greek program, leaving the Europeans free to mismanage the ongoing Greek crisis on their own.
How did it come to this? In July 2015, the EU and Greece agreed on a third bailout. Alexis Tsipras, Greek prime minister, committed himself to running a primary surplus (before the payment of interest) of 3.5 per cent of economic output each year.
No country has ever managed to maintain such a commitment over an almost indefinite period. Greek debt sustainability was thus premised on an obviously unfulfillable assumption. Greece is not only far away from achieving a 3.5 per cent primary surplus. It will never do so.
Another untold truth is that Germany will never forgive Greek debt. This is because the German parliament will not accept it, and the number of MPs hostile to Greek debt relief will be even higher after the September election.
If the German government wanted to accept debt relief measures, it could probably assemble a parliamentary majority today. The “grand coalition” led by Chancellor Angela Merkel commands about 80 percent of the seats in the Bundestag. But with the September elections, I would expect the Free Democrats, the liberal party, to re-enter the parliament after they failed to clear the hurdle last time. Their leader, Christian Lindner, said last week that the best way forward is for Greece to leave the eurozone, and for Greek debt to be forgiven afterward.
Alternative for Germany, the rightwing anti-European party, not only wants Greece out of the eurozone, but Germany as well.
Together those two parties will probably account for some 20 to 25 percent of MPs. If you add the large group of Eurosceptics from Merkel’s Christian Democratic Union and its Bavarian sister party, the Christian Social Union, it is not hard to see why the window for debt relief will close permanently this autumn.
The Greek crisis is only the most glaring example of failure to tell the truth. There are many others. Italy’s membership of a monetary union with Germany is also transparently unsustainable. Yet no Italian prime minister has ever mounted a credible challenge to the way the system is governed.
When the truth dies, we should not be surprised if alternative facts are put in its place.
Eurozone Cannot Survive Intact
Once again I agree with Münchau on what is happening. And finally, he seems headed to the obvious conclusion I have been talking about for years: “The Eurozone cannot possibly survive intact”.
I caution, however, that Münchau has been in this spot before, only to latch on to false hope.
Curiouser and Curiouser
Tsipras knows full well Greece cannot maintain a 3.5% primary surplus for decades. I doubt they can do it for even two years.
Yet, instead of admitting that fact, a position he argued before the last bailout, Tsipras now pretends, along with German finance minister Wolfgang Schäuble, that Greece can maintain a 3.5% primary surplus for decades.
As I stated in Greece Lashes Out at IMF, the game playing in Greece gets curiouser and curiouser.
Blinded by Hate
Things are now so ridiculous, that game theory alone cannot explain Tsipras’ position.
Instead, I present two alternative scenarios as follows:
- Tsipras hates the IMF so much, he is willing to kiss Schäuble’s ass in pretense Greece can meet German demands.
- Tsipras has been paid off and sold Greece out.
Mike “Mish” Shedlock