While the IMF seems to have learned from its past experiences, the European Union continues to be held back by its institutional setting. How the Greek crisis demonstrates the need for a new Europe. By Anja Spöri
‘We won’t participate without the IMF’, German chancellor Angela Merkel announced. Christine Lagarde, managing director of the International Monetary Fund, however continuous to refuse to participate. Explicit and concrete agreements on debt relief from the Eurozone creditors are needed in order for the IMF to participate in the third bailout for Greece. While no explicit and concrete agreements were reached, a third bailout was agreed upon by the Eurozone partners August 15th 2015 – without the consent of the International Monetary Fund.
Tired of being perceived as the hard-boiled cop insisting on the fulfilment of austerity measures, the IMF finally seems to fully follow its new ideological course.
While former managing director Dominique Strauss-Kahn happily contributed 30 billion Euro to Greece’s first aid package in 2010, even violating the rules of his own house, the IMF’s position towards providing financial aid to Greece seems to have changed over the past couple of months. The roles within the Greek debt crisis are changing. Tired of being perceived as the hard-boiled cop insisting on the fulfilment of austerity measures, the IMF finally seems to fully follow its new ideological course.
Having granted financial aid amounting to less than 10 billion US dollars in the 5 years prior to the global financial crisis in 2007/8, the International Monetary Fund returned to its core business – providing liquidity to cope with external balances – in the wake of the financial crisis. At the London summit of April 2009, the heads of government of the G20 countries agreed on tripling its available funds to a total of 750 billion US dollar. The once unique power of the IMF was restored. Simultaneously, the summit marked the beginning of an ideological turn. Dominique Strauss-Kahn announced fiscal stimuli as integral part of counter-cyclical economic policies to be the new path of success to follow. The ‘Washington Consensus’ was said to have come to an end. Having been the main ideology of financial institutions throughout the 1990s, the economic paradigm of market fundamentalism started being questioned. The neoliberal approach – providing financial aid to crisis countries only in case of strict implementation of orthodox economic policies, aiming at fighting high inflation rates, cutting public spending and widely deregulate the economy – seems to have largely come to an end.
Though widely welcomed as overdue, the IMF’s new approach was met with resistance from the European Union.
Though widely welcomed as overdue, the IMF’s new approach was met with resistance from the European Union. Because some of the countries had been particularly hard hit by the global financial crisis and experienced severe balance of payments problems in its aftermath, their situation initiated unprecedented cooperation between the International Monetary Fund and the EU. Ireland, Portugal, Spain and Greece have all secured multilateral aid packages of different composition, including IMF and EU loans. While, however, the IMF seems to have relaxed its formerly tight stance on economic conditionality attached, the EU actively promoted orthodox measures in return for loans as can be seen in the case of Greece.
To avoid insolvency of the Greek state and the possible negative consequences for the European financial and monetary system, the IMF and the countries of the Eurozone first provided Greece with a loan amounting to 110 billion Euros in May 2010. A second bailout, including a debt swap, was provided in March 2012, amounting to an additional 130 billion Euros. Based on Greek laws and the consent of its international creditors, the bailout however was solely provided in turn for a second set of austerity measures. A reduction in the minimum wage, the dismissal of 150.000 public servants by 2015, the continuation of state owned businesses and the prohibition of collective bargainings – contrary to the rights set out in the European Social Charter, the Charter of Fundamental Rights of the European Union and relevant conventions of the International Labour Organization – however have brought fatal social and economic consequences for Greece. Short-term considerations of the financial sector clearly have had and arguably still have the upper hand, compared to long-term public policy considerations intended to stimulate economic recovery.
Having recognized that Greece’s third bailout was built out of the same stone as the two previous ones, the IMF does not expect this loan to be any more sustainable than the previous ones have been.
Meanwhile however many international experts and organizations have cast considerable doubt as to the short- and long-term effectiveness of austerity measures. Early 2012, in a call for action to promote growth and to combat protectionism, even the International Monetary Fund, together with the World Bank and the World Trade Organization warned against the social and economic risks of austerity measures. They called on the European member states to control fiscal consolidation in such a way that growth and employment prospects are fostered rather than hindered. Having recognized that Greece’s third bailout was built out of the same stone as the two previous ones, the IMF does not expect this loan to be any more sustainable than the previous ones have been. Thus, while it seems that the IMF has learned from its past and finally seems to have got rid of its notorious reputation for its orthodox lending policies, the European Union seems to be held back by a long outdated institutional setting. Placing national interest over a common European future seems to be the main reason for the Eurozone countries insisting on austerity measures. A reviewed Europe including strong centralised economic oversight would not be guided by such thinking and is therefore long overdue.
Image: “MD Lagarde and Chancellor Merkel” by the International Monetary Fund. Published via Flickr under Creative Commons License 2.0.