THE admission by the IMF that it had vastly under-estimated the impact of EU austerity has put the troika on the spot.
If austerity is making matters worse rather than better, then why have they been administering such disastrous treatment to the eurozone periphery counties, including Ireland, for the past three years?
The admission by the IMF that it had massively under-estimated the impact of austerity on the eurozone periphery was the intellectual equivalent of lobbing a hand grenade into the debate on Europe's financial crisis.
In effect, the IMF was saying that not only have the policies dictated to Portugal, Ireland, Italy, Greece and Spain by the EU/ECB/IMF troika since the crisis first erupted more than three years ago not worked -- they have made things even worse.
The mea culpa from the IMF came in its most recent World Economic Outlook.
The IMF generally uses a multiplier of 0.5 to analyse austerity programmes. In other words, for every 1 per cent of GDP by which taxes were raised or spending cut, GDP would be reduced by 0.5 per cent.
Unfortunately, in the case of the eurozone periphery, including Ireland, this multiplier was way, way too low. The IMF now reckons that the actual austerity multiplier has been somewhere between 0.9 and 1.7 meaning that, for every 1 per cent of GDP by which taxes have been raised or spending cut, GDP has fallen by between 0.9 per cent and 1.7 per cent.
The message from the IMF is clear: Austerity isn't working and current policies are, in fact, counter-productive.
This multiplier has almost certainly been highest in Ireland. While the IMF doesn't break out its calculations by country, ratings agency Standard & Poor's, which performed a similar exercise recently, does. Using IMF data, S&P estimates that if the IMF's 0.5 multiplier was accurate, then the Spanish economy would have shrunk by 1.7 per cent between 2009 and 2011, the Greek by 5.9 per cent and the Portuguese by 3.7 per cent.
But in reality the Spanish economy contracted by 7.1 per cent, the Greek by 18.1 per cent and the Portuguese by 4.8 per cent. While the examples of these three countries demonstrate that the multiplier previously employed by the IMF was far too low, it pales by comparison with what has happened in Ireland.
During the years 2009 to 2011, the Irish government cut the cyclically-adjusted budget deficit (the underlying budget deficit after allowing for the effects of the recession) by 4.1 per cent. If the traditional multiplier of 0.5 had applied that would have translated into a 2 per cent reduction in GDP.
Except that actual Irish GDP fell by 13.5 per cent, implying a real multiplier of 3.4. Even by the comparison with the actual multipliers experienced by other peripheral countries such as Spain (2.0) and Greece (1.5), the Irish multiplier wasn't so much very high as completely off the scale.
If the IMF is right, then all of the pain and sacrifice of the past four years has been in vain. If the troika were doctors rather than economists, they'd have been struck off long ago.