A Lesson From Greece: Beware the Prophets of Boom

In 2010, as Greece signed a bailout deal with the International Monetary Fund, forecasts by the IMF and the European Commission suggested the country’s debt-to-GDP ratio would peak below 150 percent of gross domestic product in 2012. The forecasts also projected that Greek GDP in 2015 would be 8 percent larger than in 2011. This optimistic vision of the future was based on underlying assumptions that Greece would go from having the lowest productivity growth in the euro zone to among the highest, alongside the highest labor force participation rates and employment rates equal to Germany’s.

No one—including the IMF—believes those assumptions anymore. The latest estimates suggest Greek GDP will be 10 percent smaller than in 2011. Why were those early prognostications so rosy? It turns out that the IMF, the EU, and other institutions have a tradition of consistently overoptimistic growth forecasts in times of crisis. Dealing with that tendency would significantly reduce the harm done by future financial crises.