why debtors like the IMF or the EU demand austerity measures when austerity may cause economic downturns like Greece?
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It comes down to politics. IMF didn’t ask for austerity per say. It actually asked for debt reduction and more investment plans.
EU was asking for austerity, mainly because of politics. It’s politicians answer to their own electorates and their goal is to get re-elected not to recover the economy or whatever else.
It is easier to blame the downturn of your own economy to someone else who can be seen as an scapegoat rather than admit your own failings and get to work to restructure stuff. It takes time to rebuild an economy and politics is shortsighted.
Don’t be confused, Greece had it’s problems and remains a problematic economy due to structure. But French and German banks, mainly, needed a bailout of the Greek bonds they had bought under the watch of the EU policies and politicians.
It was easier to discuise the bailout of private banks as a rescue plan for Greece and blame Greece for it’s failings, rather than explain what went wrong.
The anti-EU sentiment would have increased a lot and might have broken up the EU, the Banks Needed the bailout, there is no question about it and letting them fail was not an option. If people learned the truth then this was seen as a doomsday for EU and the politicians that supported it’s policies and were in power then.
At least this way you make people accept sacrifices while also keeping the system going on and them obedient. Their dissident will be with the forengers not the policies and institutions politicians wanted intact.
Edit: some mistakes sorry I am typing from mobile
The theory behind demanding austerity is that at the end of the day whatever amount of economic activity is happening in the country, their spending is too high to be supported. That is why they ended up needing IMF help in the first place.
By forcing the government to tighten their belt and spend less they will presumably cut more useless expenditures than useful ones. While there may be some downturn in economic activity through this process business will adapt and recover.
There aren’t any good alternatives in a complex situation like that.
Put it simply, whether the situation is one where they could control, the government is held accountable for the situation where they require emergency funding. Most countries that find themselves in this situation have governments that are spending much more than they are receiving in taxes, their economy isn’t generating sufficient positive trade balance so that their central bank can keep printing money (not Greece’s situation since they cannot print Euros) and they are now incapable of avoiding a default on prior loans.
Lending them more money is rather pointless if there are no measures taken to correct the problem in the first place. All that would very likely happen is that the newly borrowed money is spent the same way that the earlier borrowed money went and the situation is back to the same problem.
There are no really good solutions, the country could just declare themselves in default and refuse to pay their outstanding debt. This might cause the existing lenders some problems. But it almost certainly means NO ONE ELSE would lend them any money. Given that the country got to this position by doing what they’re currently doing, it is then unclear how the economy survives. The government (if they controlled their currency) could just print more and more money but that very likely leads to hyperinflation and fairly rapid economic collapse. This is almost always worse than austerity measures. It would also lead to capital flight, possibly human migration, and many other social problems.
From a political standpoint, IMF “demanded” austerity measures are a useful scapegoat. Local politicians have someone external to blame for their mismanagement which might buy them some time to clean up the mess they created.
Ask yourself this, how many courageous politicians (in Greece perhaps) have straight up said – “we hired too many civil servants”, “we cannot collect taxes”, “we have overgenerous welfare packages that the local economy cannot afford to fund”, “we have terrible productivity and underinvested in infrastructure” or “our society cannot produce enough to support our lifestyle”. And yet, these are exactly the things that caused the situation.
In Greece the issue was the business model clash between the EU architecture and the greek economic reality. The eu is based upon an export model, where you get as efficient as possible so you sell to others at the cheapest possible price, this is primarily german, and Chinese models, the inverse is the Americans model which is based upon internal consumption where people buy as much as possible and sell services or investments to other people.
Now the greek economic architecture is based upon shipping, tourism, and high end oils such as olive oil. Not many things to export(washing machines, audisetc) , but lots of things people want buy internally eg holidays, drinks, property rentals, booze. The global financial crash messed with finances of loaning money and it stopped coming in for Greece. This destroyed the greek budget and it also meant a lot of European banks could fail if not paid back bankrupting the eu. So the eu “bailed out” greece
But As such the eu prioritised making sure those debts were paid back., but in doing so they also applied the logic of becoming efficient to export things as is the business model they are used to. This meant greece had to be more efficient with its prices, the biggest component of this is wages in the greek economy. So they deliberately ensure that wages and other inflationary things such as government expenditures were depressed so that greek “goods” would be cheaper to export. Even though most economic activity for Greece is actually imported via tourism etc. in in effect they depressed living standards to reduces prices . Which is also called austerity. Bad times for the greeks, but it ensured that bnp or soc general didnt go bankrupt
**CREDITORS** not debtors. The IMF and EU are creditors. Greece was the debtor.
As for why, it’s simple: The current spending is in excess of the government’s revenues. You have a limited number of choices to fix that problem: Raise revenue or cut spending. It’s not a complex set of circumstances.
The implied counter-argument you’re making is that the spending programs are actually producing economic growth which will yield better revenues in the future. This is, regretably, plainly refuted by the facts. According to the Maastricht Treaty, all EU countries must:
Have a consolidated gross debt of no greater than 60% of GDP
Have a budget deficit (new debt each year) of no greater than 3%
Maastricht was signed in 1992, the Euro was rolled out in 1999. Greece *never* held below these thresholds, from 2000 to 2007, the high times before the crash happened. So, from that entire time when Greek spending exceeded the limits set by the treaty they had signed, did Greek GDP grow? Sure. Did it grow by enough to ever conceivably pay back their debt? Absolutely not.
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