Portugal’s example shows why the IMF will ruin Greece
Imagine a country that strictly follows stringent cuts demanded by the IMF. Imagine a country that has slashed massively is applauded by the IMF and its friends. Surely it’s on a path to recovery?
That country is Portugal and in fact it is spiralling deeper into a hole. The austerity is shrinking its economy – making its national debt even harder to pay off. If this carries on, Portugal will also have to default.
And Portugal’s sad example shows why Greece should tell the IMF that its prescribed austerity won’t work. Austerity kills growth – creating a worsening debt spiral.
Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May.
The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.
Portugal’s economy shrank by 1.5% and is expected to contract by 3% this year. It is not expected to grow again until 2014 (optimistically).
The same is happening with Greece. Figures revealed last week showed Greece’s economy had contracted even more than expected. Guess what the IMF wanted in response – more cuts!
Guess why this is unsustainable:
According to the calculation of Mr. Bencek, the economist, Portugal would need to produce a primary surplus of about 10 percent of G.D.P. in the coming years to reduce its debt ratio to a permanently serviceable level. That, he said, would require a degree of cuts in spending far beyond what Mr. Gaspar and his team have already been able to achieve.
Imagine what that ratio is for Greece. And the same will happen to Italy – at which point the whole of Europe starts to become financially insolvent.
The IMF is ruining Europe’s economies by putting them on an unsustainable path of worsening austerity. Even commentators at the Telegraph (Jeremy Warner) recognise this. To a lesser extent – the same scenario played out in the UK too.
The Conservative mantra – ‘you have to cut debt by cutting spending’ – is proving to be hollow across Europe.