Greece: A Credible Deal Will Require Difficult Decisions By All Sides


blanchBy Olivier Blanchard

(Versions in 中文Françaisελληνικά, عربي, and Español)

The status of negotiations between Greece and its official creditors – the European Commission, the ECB and the IMF – dominated headlines last week.  At the core of the negotiations is a simple question: How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?

In the program agreed in 2012 by Greece with its European partners, the answer was:   Greece was to generate enough of a primary surplus to limit its indebtedness.  It also agreed to a number of reforms which should lead to higher growth.  In consideration, and subject to Greek implementation of the program, European creditors were to provide the needed financing, and provide debt relief if debt exceeded 120% by the end of the decade.

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Fiscal Policy’s Evolving Role


Fiscal policy makers have faced an extraordinarily challenging environment over the last few years. At the outset of the global financial crisis, the IMF for the first time advocated a fiscal expansion across all countries able to afford it, a seeming departure from the long-held consensus among economists that monetary policy rather than fiscal policy was the appropriate response to fluctuations in economic activity. Since then, the IMF has emphasized that the speed of fiscal adjustment should be determined by the specific circumstances in each country. Its recommendation that in general deficit reduction proceed steadily, but gradually, positions the IMF between the fiscal doves (who argue for postponing fiscal adjustment altogether) and the fiscal hawks (who argue for a front-loaded adjustment).

All this is highlighted in a  recently released book Post-Crisis Fiscal Policy, edited by Carlo Cottarelli, Philip Gerson and Abdelhak Senhadji,  that brings together the analysis underpinning the IMF’s position on the evolving role of fiscal policy.  The book underscores how the global financial crisis has reshaped our understanding of the role of fiscal policy with topics that include a historical view of debt accumulation; the timing, size, and composition of fiscal stimulus packages in advanced and emerging economies; the heated debate surrounding the size of fiscal multipliers and the effectiveness of fiscal policy as a countercyclical tool and more.

Check out this book, which is written for a wide audience, and watch the webcast of the book launch hosted by the Peterson Institute for International Economics on July 14 .

Portugal: Completing the Job


Subeer LallBy Subir Lall

(Version in Português)

Today the IMF released a report on Portugal’s progress under the country’s Economic Adjustment Program. What is the latest assessment?

A strong start

There is no doubt that Portugal has made remarkable progress over the past three years. When the sovereign lost access to international bond markets in 2011, the outlook was grim. The economy was facing large domestic and external imbalances and dismal growth prospects. Unprecedented official financing from Portugal’s European partners and the IMF provided a window of opportunity to address the weaknesses at the root of the crisis and regain market confidence. While constrained by formal and informal strictures, the authorities rose to the occasion.

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Death and Taxes May be Certain—But Taxes We Can Make Better


Mick KeenBy Michael Keen

(Version in Español)

Benjamin Franklin famously said these are the only things that we can be sure will happen to us. Certainly taxation has been much to the fore of public debate in the last few years. The latest Fiscal Monitor takes a close look at where tax systems now stand, and where they might, and should be headed. Can we tax better, could we—if we wanted to—raise more revenue, and how does fairness come into it?

A better way to tax

The IMF’s broad advice on the revenue side of consolidation is straightforward.

  • Before raising rates, broaden bases by scaling back exemptions and special treatments, and thereby getting more people and entities to pay taxes;
  • Rely more on taxing consumption rather than labor;
  • Strengthen property taxes; and
  • Seize opportunities to raise revenue while correcting environmental and other distortions by, not least, carbon pricing (to address climate and other pollution challenges).

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Signs of Fiscal Progress: Will It Be Enough?


By Carlo Cottarelli

(Versions in  عربي, 中文EspañolFrançaisРусский日本語)

We’ve just updated our latest assessment of the state of government finances, debts, and deficits in advanced and emerging economies.

Fiscal adjustment is continuing in the advanced economies at a speed that is broadly appropriate, and roughly what we projected three months ago. In emerging economies there’s a pause in fiscal adjustment this year and next, but this too is generally appropriate, given that many of these countries have low debt and deficits.

The improvement in fiscal conditions in many advanced economies is welcome, but it’s going to take more than lower deficits to get countries under market pressure out of the crosshairs.
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Fiscal Adjustment: Too Much of a Good Thing?


By Carlo Cottarelli

(Versions in  عربي中文EspañolFrançais, Русский, 日本語)

The IMF has argued for some time that the very high public debt ratios in many advanced economies should be brought down to safer levels through a gradual and steady process. Doing either too little or too much both involve risks: not enough fiscal adjustment could lead to a loss of market confidence and a fiscal crisis, potentially killing growth; but too much adjustment will hurt growth directly.

At times over the last couple of years we called on countries to step up the pace of adjustment when we thought they were moving too slowly.

Instead, in the current environment, I worry that some might be going too fast.

Risk to recovery

The latest update of the Fiscal Monitor shows that fiscal adjustment is proceeding pretty quickly in the advanced economies—on average the deficit is projected to fall by a total of 2 percentage points of GDP in 2011-12. The decline is even larger in the euro area—about 3 percentage points of GDP. In a reasonably good growth environment this pace of adjustment would be fine. But in the current weaker macroeconomic environment bringing deficits down this quickly could pose a risk for the economic recovery. Continue reading

How Iceland Recovered from its Near-Death Experience


 By Poul M. Thomsen

(Versions in Español and Français)

When I traveled to Reykjavik in October 2008 to offer the IMF’s assistance, the situation there was critical. The country’s three main banks—which made up almost the entire financial system—had just collapsed within a week of each other. The sense of fear and shock were palpable—few, if any, countries had ever experienced such a catastrophic economic crash.

There was a lot of concern that a disorderly depreciation of the exchange rate would be ruinous for households and companies if nothing was done or that deposit runs would cripple what was left of the financial system. The scale of the uncertainty was staggering―the three banks had assets worth more than 1,000 percent of GDP, and no one knew at that point how large the losses would turn out to be and how they would be divided between Icelanders and foreigners.

Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Continue reading

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