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Sunday, June 9, 2013

The developed world is going through a series of crises. On one hand, economic growth has been anaemic. Unemployment levels have been high and rising. On the other hand, sovereign debts have reached unsustainable levels. What is even more worrying is the fact that policymakers have completely failed to respond meaningfully to the crises. If anything, their steps have only made the crises worse.

The most recent admission of error is by the International Monetary Fund (IMF). As per an article in the Wall Street Journal, the IMF has confessed that it had taken several wrong steps in handling the Greek bailout.

The IMF tweaked its own rules to make Greece's rapidly increasing debt burden look sustainable. Out of four criteria that are required to qualify for aid, Greece had failed on three. Moreover, it also underestimated the effect of its prescribed austerity on the Greek economy. It expected Greece's economy to be impacted by just 5.5% between 2009 and 2012. However, in reality the country lost 17% in real economic output. Even the unemployment levels exceeded the targets by a whopping 1,000 basis points (10%).

This only exposes us to the fact that the debt crisis in Europe is far from over. The bailouts have done nothing but only delayed the eventual crisis. It wouldn't be an exaggeration to say that a far bigger global crisis could be somewhere around on the horizon.

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