The IMF’s role as a member of the Troika, the grouping of the European Central Bank (ECB), European Commission and the Fund in the eurozone crisis, is attracting new criticism. The deepening recessions in many eurozone nations has brought the efficacy and appropriateness of Troika-led reforms into question.
Criticism of the Fund’s European involvement includes the claim that it risked its independence as part of the Troika. Support for this view has come from the leaked resignation letter of a 20-year IMF veteran, Peter Doyle, who resigned as an adviser in the IMF’s European department in July. Doyle accused the Fund of “failing” in its surveillance function by having “suppressed” publication of problems in Europe that had been identified well in advance, so much so that the Fund was consequently “playing catch-up and reactive roles in the last ditch efforts to save [Greece]”, causing “suffering for many”. He laid the blame for these failures on the Fund’s “analytical risk aversion, bilateral priority and European bias”, problems which he argued had become “even more entrenched” and stemmed from the “evidently disastrous” appointment process for the managing director post (see Update 77, 76).
According to the Telegraph, Germany’s central bank has echoed these concerns in its September monthly report: “The IMF is evolving from a liquidity mechanism into a bank. This is neither in keeping with the legal and institutional role of the IMF or with its ability to handle risks.” The Financial Times noted the Bundesbank’s concerns that this “transformation would neither accord with the legal and institutional provisions of the IMF agreement, nor with the fund’s financing mechanism or its risk control functions.”
Arvind Subramanian, formerly IMF assistant director, wrote in the Financial Times that the IMF’s conduct during the European crisis demonstrates how it “is failing”.” He suggested that the Fund has “not provided independent intellectual leadership” throughout the eurozone crisis and is consequently “unprepared to provide stability for the next big global crisis.” He argued that the Fund’s status as “junior” member of the Troika means it cannot criticise policies publicly, but rather must “fall into line” once policy choices are made. As a result, the Fund is “failing to challenge orthodoxy, forfeiting its role as a valuable referee in the policy debates”.
Setbacks in European reforms
The July update of the IMF’s flagship World Economic Outlook set out the scale of the task to overcome financial crisis in European states. The update forecasts eurozone GDP growth of -0.3 per cent in 2012; this itself was based on an assumption of “sufficient policy action to allow financial conditions in the euro area to ease gradually”, noting “downside risks loom large”.
UNCTAD’s September Trade and development report described the institutional measures used in Europe as “inadequate, because they do not have growth recovery as their main goal”. The report argued that resolution of the crisis will require breaking from initiatives that “continue to follow the old blueprint” of the Stability and Growth Pact (the European Union agreement on budget and spending restraints), which emphasises fiscal consolidation through expenditure cuts.
ECB president Mario Draghi proposed in September a eurozone crisis solution, committing the ECB to conduct new bond-buying programs. ECB board member Jorg Asmussen, when discussing the prospect of these programmes in late August, advocated for the IMF to be “involved in setting the economic adjustment programmes because the IMF … has unique know-how and has high leverage as an external policeman in these cases”. IMF managing director Christine Lagarde declared “we strongly welcome the ECB’s new framework” and that “the IMF stands ready to cooperate” with the ECB in the new framework for intervention.
Troika reforms contested
The Troika’s loans to Greece, valued between €164 billion ($211 billion) and €173 billion (see Update 80), have attracted further criticism. Greece’s government appointee to the IMF executive board up to January, former finance minister Panagiotis Roumeliotis, was quoted in the New York Times saying: “We knew at the Fund from the very beginning that this programme was impossible to be implemented because we didn’t have any – any – successful example”. Roumeliotis also noted that the Troika underestimated the negative effect of its measures, arguing that it is wrong to claim that Greece’s “deep recession is because of the non-implementation of the structural reforms when it is the severe cuts themselves that have led to the under-performance of the Greek economy”.
An August letter from the Troika to the Greek government set out some of the anticipated labour market reforms it is seeking, including permitting a six-day work week in all sectors, removing overtime limitations and restrictions on minimum wage levels. In July, a national poll found that the majority of Greeks advocated renegotiating the terms of the bailout. Elena Papadopoulou, of the Nicos Poulantzas Institute in Greece, said that “since the signing of the first Memorandum of Understanding in March 2010, all adjustment programs have failed to bear the promised fruits. Recession has deepened dramatically, unemployment has skyrocketed, the welfare state is collapsing and the ‘ultimate goal’ of containing public debt has run aground since its restructuring last March was unable to render it sustainable.”
The conclusion of the Troika’s September visit declared that Greece was “making progress” in finding the necessary budget cuts. Press reports suggested that the Fund had been seeking to ease the Greek burden via debt forgiveness, but European creditor nations were resistant. In September the French finance minister and the Fund suggested the possibility of extending deadlines for Greek reform targets in exchange for further commitments to implementation of expenditure cuts. The Greek alternate Executive Director to the IMF, Thanos Catsambas, added that “Greece will need additional funding from its creditors to overcome its budget gap.” Reports in the German newspaper Der Spiegel suggested that the Fund had sought to stop acting as a direct lender to Greece – reports which were promptly denied and led the managing director Christine Lagarde to restate that “the IMF never leaves the negotiation table.” She indicated in a September speech to the Petersen Institute that European policy makers should consider “slowing the pace of fiscal adjustment where needed”.
Ireland’s July loan review maintained the aim of the country accessing international capital markets by 2014. Significant controversy surrounds the bailout by the Irish state for Anglo Irish Bank; taxpayers are now repaying the bank’s bondholders. “The IMF has been more vocal than the European Troika members on the need to address Ireland’s banking debt.” Nessa Ni Chasaide of Debt Ireland noted. She added that “zombie Anglo Irish Bank debt alone is costing Ireland €3.1 billion per year – more than the annual cost of running Ireland’s entire primary school system. However, the IMF only proposed a re-scheduling of the Anglo Irish payments and some form of refinancing through the eurosystem. It is not clear if the IMF’s minimal proposal has any support from European governments who have continuously refused Ireland debt justice. We want a full cancellation of the illegitimate €30.1 billion Anglo Irish Bank debt.”
In Portugal, the Troika’s fifth quarterly review of progress in implementing the conditions agreed in 2011 in exchange for a €78 billion loan indicated that the original austerity targets are unlikely to be achieved. Portugal’s deficit targets have been eased substantially as a result, up to 5 per cent of GDP in 2012 and 4.5 per cent in 2013 (from a target of 3 per cent), though the Troika cautioned that “reaching the new deficit targets will require additional consolidation efforts”. Mass strikes in late September to protest at the agreed labour reforms succeeded in bringing the process to a halt, as the prime minister offered to hold talks with unions and other protesting parties.
A July IMF working paper by staff and external authors, which does not represent the view of the Fund, studied the efficacy of policies of fiscal consolidation in developed economies, comparing evidence from Europe, Japan and the United States. Its findings suggested that the fiscal consolidation approach, emphasising large and early cuts to expenditure, has proved to be “counterproductive”. The paper found evidence that front-loaded fiscal consolidations are in fact likely to be “more contractionary” and “delay the reduction in the debt-to-GDP ratio”, defeating the purpose of deficit reduction strategies. Approved for distribution by Peter Doyle, it noted that the “output effects of 2009 fiscal expansion have been hotly debated” and that “smooth and gradual consolidations are to be preferred to frontloaded or aggressive consolidations.” Therefore, the “key to success of fiscal consolidation” in the European context was argued to be the “protection of growth.”
The United Nations Conference on Trade and Development’s Trade and Development Report argued inequality must be addressed if reforms are to succeed. It contends that “A comprehensive incomes policy linking wage and productivity growth and including legal minimum wages and a tight social safety net for poorer families would favour investment dynamics and monetary stability.”The September report argued that “the experience of the past few decades has shown that greater inequality does not make economies more resilient to shocks that cause rising unemployment … It has made economies more vulnerable.”