OECD admits to forecasting errors during eurozone crisis

The OECD has admitted its repeated false assumption that governments would take effective steps to ease the euro zone crisis was to blame for the international organisation’s overly optimistic forecasts, not the impact of austerity.

The findings from the Organisation for Economic Cooperation and Development's postmortem exercise on its forecasting record lie in stark contrast to those of the International Monetary Fund, which said controversially in 2012 that all forecasters had underestimated the effect of austerity on the recovery – known as fiscal multipliers.

Pier Carlo Padoan, the OECD's chief economist, rejected that view yesterday, in findings that will bolster Germany and other governments that have always said fiscal consolidation was a necessary part of the response to the crisis rather than a mistake that consigned millions to unemployment and poverty.

Dissipate
"The OECD did not underestimate fiscal multipliers," he said. "It was the repeated assumption that the euro crisis would dissipate over time, and that sovereign bond yield differentials would narrow, they turned out to have been the most important source of error."

Nigel Pain, another of the report's authors, said a comparison of the US and euro zone suggested there were many other reasons for differential economic performance than austerity and fiscal policy.

The OECD tried to find a connection between the degree of deficit reduction between countries and the over-optimism of its forecasts, but found a statistically significant link only for one year and only if Greece was included. When the researchers tried to link multiple causes of the over-optimism, the significance of the effects of fiscal policy disappeared. – (Copyright The Financial Times Limited 2014 )