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Will Greece Return to Haunt the EU After IMF Refutes Austerity Claims?

Will Greece Return to Haunt the EU After IMF Refutes Austerity Claims?

Nick Cawley, Senior Strategist


Talking Points

- IMF says that it did not call for additional Greek austerity measures.

- Warns that significant debt relief and structural reforms are needed.

- Next year brings a host of European elections.

A recent blog post by two senior International Monetary Fund officials appears to pour cold water on claims that the institution is demanding additional austerity measures from Greece as the second review of its European Stability Mechanism (ESM) program gains pace. The re-emergence of debt relief talk will be unwelcome news for those in Brussels who are currently busying themselves with Brexit negotiations and the ongoing financial problems in the Italian banking sector. A re-opening of fractious Greek debt talks will also hurt the single currency especially ahead of potentially problematic elections in the Netherlands, France, Italy and Germany next year.

According to IMF officials, chief economist Maurice Obstfeld and European department director Poul Thomsen, the institution is not demanding more austerity, either now or as a means to lower the need for much needed debt relief over the mediumterm.They said that when the Greek Government agreed with its European partners in the context of the ESM program to push the Greek economy to a primary fiscal surplus of 3.5% by 2018, “We warned that this would generate a degree of austerity that could prevent the nascent recovery from taking hold. We projected that the measures in the ESM program will deliver a surplus of only 1.5% of GDP, and said this would be enough for us to support a program. We did not call for additional measures to achieve a higher surplus. But contrary to our advice, the Greek Government agreed with the European institutions to temporarily compress spending further if needed to ensure that the surplus would reach 3.5% of GDP.”

Further, the two argue that while the country has made a huge fiscal adjustment it has done so without addressing two key problems—an income-tax regime that exempts more than half of households from any obligation and an extremely generous pension system. Moreover, they say that no amount of structural reform will make it sustainable again without “significant debt relief”.

And it is the thorny issue of debt relief that will chime the loudest, with Germany in particular unlikely to give any backing to any proposal to reduce Greece’s onerous debt pile. With elections ahead next year, and with incumbent Chancellor Angela Merkel already coming under pressure over her migrant policy, arguing for Greek debt relief will be the last thing on Merkel’s list of things to do in 2017.

The political situation in Greece may also come back into play, with recent polls showing the more European Union friendly New Democracy (ND) party overtaking the anti-EU ruling Syriza party in voting intensions. A shift in government towards ND, along with the promise of further debt relief talks further down the line, may well bring the EU the precious breathing space it needs as it readies itself for a clutch of tricky elections in 2017.

--- Written by Nick Cawley, Analyst

--- To contact Nick, email him at

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.