Once again, the IMF is faced with the big mistakes it made during the crisis in the European South. This time comes a report by the ECB to criticise the Fund’s practices that former IMF economist Olivier Blanchard had admitted to Greece. Of course, the mistakes concern the South as a whole.
Many heads were turned in January 2013 with the publication of the 43-page study by former IMF chief economist, Olivier Blanchard, entitled “Forecasting Mistakes and Fiscal Multipliers”. In essence, the IMF admitted that due to a mistake with a multiplier it imposed much greater austerity (salary cuts in the state, pensions, etc.) in countries such as Greece and Portugal, resulting in a much a greater fall in domestic demand.
Recently, four ECB economists (ECB) calculated the figures of the Blanchard analysis based on improved data, and the conclusion was published in the ECB Research Bulletin entitled “Learning about fiscal multipliers during the European sovereign debt crisis”.
In particular, the information on the amount of the multiplier presumed by the European Commission has improved. Blanchard had to assume that the Commission had started from the widely accepted assumption of a multiplier of 0.5. Brussels traditionally holds particularly low tones in terms of forecasting and crisis assumptions.
Blanchard compared real economic growth in the countries that were in a program, in relation with the forecasts, and attributed the error to the fact that the multiplier had to be higher than the estimated 0.5 – much higher.
The economists of the ECB used, on the one hand, the Commission’s normal forecasts and, on the other, forecasts according to the excessive deficit procedure. The former are drawn up on the assumption of a fiscal policy as this is defined in the budgets. In the latter case, on the other hand, the Commission assumes additional fiscal measures will be taken, which were necessary to reduce the deficit up to a specific year below 3% of GDP. A financial multiplier can be calculated from the comparison of these estimates.
As they found in Frankfurt, the multiplier was in accordance with this method of calculation less than 1, ie lower than that of Blanchard, and that the Commission learned over the years some things and accepts a constantly higher multiplier. And why was this happening? Because the Commission did not take into account in the first years the usual multiplier of 0.5, but apparently it started from being close to zero, which basically means that the original assumption was that the cuts in government spending would have almost no negative impact in economy! It was extremely naive.
The group of economists from Frankfurt show that over time the Commission has realized that the economies of the countries in the program suffered far more than was supposed. From almost zero in 2010 and 2011, it increased until the last excessive deficit procedure, the presumptive multiplier Of the effect to the French economy, to 0.9 in 2015./IBNA