All those making the case that many of the demands imposed on Greece by its troika of lenders have done more harm than good can feel somewhat vindicated by a draft report recently released by the Committee on Economic and Monetary Affairs of the European Parliament into the role and operations of the troika in Memorandum countries. (full text available here)

According to the authors, among the troika’s main failings was that it was “over-optimistic” in its assumption of growth and underestimated the political resistance it would face, with the result being that ‘fiscal targets could not be met.’ This basic miscalculation meant that rather than achieve a reduction in the ratio of public debt to GDP – one of the basic goals of Memorandum policies – the ratio has “instead sharply increased in all of the Memorandum countries.”

In short countries such as Greece may have slashed public spending, but the harshness of austerity imposed caused GDP to shrink disproportionately, meaning that the public debt to GDP ratio has increased.

The draft report also highlights that there are divisions within the troika over the root cause of the miscalculations. While the IMF admitted to underestimating the fiscal multipliers in its growth forecasts prior to October 2012, the Commission in November 2012 stated that forecast errors were not due to underestimation of the fiscal multipliers. Yet, as the report notes, there was no further follow up to this public disagreement.

The authors call upon the troika to take stock of the debate on fiscal multipliers and consider revising the current Memoranda accordingly.

The report also ‘considers that too little attention has been given to the negative impact of adjustment strategies in the programme countries” and criticizes the fact that the troika had demanded ‘specific and detailed prescriptions for health system reform and expenditure cuts’ in Memorandum countries, potentially impacting citizen’s fundamental rights. It is recommended that ‘social partners’ be included in the design and implementation of ‘current and future’ adjustment programs.

And while it is noted that the troika effectively succeeded in avoiding a disorderly default and meltdown of the eurozone which would have had wrought chaos in Europe, “there is no guarantee that this will be avoided in the long term.”

The report also highlights problems with the make-up and legal remit of the troika saying, “… there was no appropriate legal basis for setting up the troika on the basis of Union primary law.” and that democratic accountability was weak. It also warns that there is also the potential for a conflict of interest over the Commission’s role one one hand as a member of the troika, and on the other as the defender of treaties.

It is also suggested that the role of the IMF be gradually phased out, and replaced by a newly created European Monetary Fund.

The final draft of the report will be officially presented on the 16th of January and will also take into account more information from hearings in Memorandum countries due to take place over the coming weeks.

The report’s authors Othmar Karas (EPP, AT) and Liem Hoang Ngoc (S&D, FR) said:

“We have thrown our work into the open.  This is the first step.  It is now through the hearings and our visits to the affected countries that we, and our colleague MEPs, will delve deeper to gather evidence to inform any recommendation for change.  We shall also receive answers to a detailed questionnaire that we put to key policy makers. We welcome the European Commission's willingness to contribute, and invite others, in particular the ECB and Eurogroup, to follow suit in the same spirit of transparency and accountability. ”