Olivier Blanchard (the IMF’s chief economist) and Daniel Leigh tell us in their new working paper that IMF forecasters “significantly underestimated” how much damage austerity would inflict on employment and growth in Europe.  The authors are careful to insist that their results do not imply that austerity should be abandoned:  “The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single economy.”

Greece’s particular pace of fiscal consolidation, required by the EU-ECB-IMF “troika” as part of the Greek bailout deals, has helped deliver a rise in unemployment that looks like this:

That’s from a new policy note by Giorgos Argitis.  Argitis focuses on the “Greek deal” reached this past November and concludes that it, along with the troika’s entire strategy to date, cannot succeed—even by its own cramped set of objectives.  “[T]he debt structure of the Greek public sector was not sustainable before, did not become sustainable after the ‘haircut’ in March 2012, and will not become sustainable as a result of the Eurogroup’s decision in November,” he writes.

The problem is not just that austerity is creating devastating levels of unemployment (which, if you’ve been following the debate, is all-too-easily dismissed as a necessary cost—a sign of virtuous suffering), but that the economic damage is so severe that the austerity strategy is likely to be self-defeating on its own terms, which is to say, with regard to the objective of significantly reducing debt-to-GDP ratios.

The enforcement of austerity keeps Greece locked in what Argitis calls a “default trap.”  Fiddling with the pace of fiscal consolidation is not going to fix this strategy.  We need to move in a new direction, according to Argitis, involving a more fundamental restructuring of Greek public debt and policies to generate growth in the short and long term.  Argitis borrows from Minsky’s idea of an employer of last resort and calls for the creation of employment guarantee programs (like this ones described here) that can create immediate economic expansion and ultimately generate the primary surpluses Greece needs to meet its debt obligations.