A schism has appeared in the troika. The leader of the IMF is openly questioning Germany’s adherence to austerity dogma. Wolfgang Schaeuble responds,
When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher.
Wolfie, what if the path our intrepid mountaineer initially selected is impassable? Should he adhere to the his initial plan so that we find his frozen Ötzi-like corpse years later?
A recently released IMF study shows that the consequences of austerity are consistently underestimated. Commentators outside the mainstream have been repeating this for years, and it is nice that IMF has finally come aboard. Look at this chart comparing government budget projections with the actual deficits in Greece and Spain since the beginning of the eurocrisis:
The forecasts are not even in the ballpark. Part of this inaccuracy can be blamed on the usual lying by politicians, but the rest is due to budget cuts producing much larger decreases in tax revenues that anticipated.
The real solution is actually quite simple. Spain and Greece need to leave the euro and allow their readopted national currencies to depreciate. However, the cult of the euro currently makes this course of action politically impossible.
Since the real solution is off the table, Lagarde proposes a half-assed one harkening to her French roots: more spending. The trouble is that there is no more money to spend. Greece can no longer borrow money on its own, and Spain is about to suffer the same fate. Any increased spending will by necessity come from the wealthy northern tier led by Germany.
Lagarde’s other proposal is to allow Greece and Spain more time to reach their deficit goals. This plan suffers from two problems. First, the Germans will have to pay for more time right before their election. Second, the IMF’s own study just told us that austerity has more severe consequences than originally believed; hence, this is really not a new plan just the old plan delayed by a year or two. What we have here is another can-kicking exercise.
The troika may be able to maintain the status quo of an ongoing, low-level crisis with its current plan, but ultimately only an outright de jure default or a de facto default via the adoption of a devalued currency will get these countries out from under their debts so that they can begin growing.