The German bloc will have to take its bitter medicine in Greece

A Plan Gone Horribly Wrong

By Ambrose Evans-Pritchard

Every detail of the Greek economy is worse than officially forecast just weeks ago.

1. The budget unveiled this morning estimates that public debt will reach 189pc of GDP next year (not 179pc).

2. The budget deficit will be 5.2pc (not 4.2pc).

3. The economy will shrink 4.5pc next year (not 3.8pc). 

4. Unemployment is already 25.1pc and 55.6pc for youth.

Just for the record:

The EU-IMF Troika originally said that the economy would contract by just 2.6pc in 2010, before growing by 1.1pc in 2011, and 2.1pc in 2012.

In fact Greek GDP contracted by 4.5pc in 2010, 6.9pc in 2011, and will shrink 6.5pc this year, and now 4.5pc next year.
The cumulative error is colossal.

The IMF's former deputy chief John Lipsky told an HSBC forum in London earlier this month that it was impossible for the Fund to make any accurate forecast, given the crazy circumstances in Greece.

I don't wish to be unduly harsh on the IMF – a superb organisation – but actually the Greek Labour Institute and the think-tank IOVE did predict this level of contraction.

The IMF simply lost its political way in Greece. It knew – or should have known from dozens on rescue operations around the world – that Greece would crash into a self-feeding spiral without a rapid debt restructuring and a devaluation.

Both channels were blocked because of the sanctity of the EMU Project. (Though default would come later, in a capricious fashion, singling out pension funds, insurers, and private creditors only).

The policy never had any chance of working for Greece. The IMF under Strauss-Kahn went along with the EMU agenda, pretending all was well, sacrificing the Greeks to gain time for the European financial system to build up safety buffers.

Thomas Wieser, the head of the European Working Group handling Greece, said today that press reports of further debt restructuring and official "haircuts" in the current Troika talks are pure fantasy.

If that is so – and what he means is that Germany, Holland, Finland, and Austria will not tolerate a haircut on their holdings of Greek debt – then the creditor countries are trying to maintain a ridiculous illusion for their own internal political reasons.

Greece cannot claw its way out of a 190pc of GDP debt load. The official haircut is coming sooner or later, and it will be an explosive political moment.

Chancellor Angela Merkel will have to account for direct losses to the Bundestag. A line will have to be written into the German budget covering the X billions of euros. Other line items may have to be cut. Welfare support for Germans, perhaps.

Having insisted for over two years that German taxpayers face no risk of loss on the Club Med rescue packages – and having indeed told them it generated a profit – she will have to explain why this has gone horribly wrong.

No doubt she will try to delay this awful moment until after the German elections late next year. But the calendar of simmering revolt in Greece is not in her hands. One of the three parties in the pro-Memorandum coalition has already refused to go along with the budget plans. The Government majority is thinning fast.

My guess is that Mrs Merkel will be forced to admit to the German nation that contingent liabilities are turning into real liabilities long before her elections.

I leave it to German readers to tell us what the likely response be in the Bundestag and the German press.