An IMF Program for the Eurozone
Note: This piece appeared as an Op-Ed in the Financial Times and was co-authored by Re-Define MD Sony Kapoor & Advisory board member Charles Goodhart
Whether or not Greece has to leave the eurozone, and whether or not a growth compact is added to the fiscal treaty, there is likely to be a further call – or calls – on the International Monetary Fund for help with funding firewalls to protect the eurozone from meltdown. The IMF should take this opportunity to be more robust than it has been in the past in dealing with Europe’s problems.
Before the crisis, the IMF had come to be seen as a pariah by the developing world and as largely irrelevant by the developed world. It has used the second wind accorded to it by the crisis fairly well. It appears to have learnt lessons from past follies and has made brave efforts to tackle the problems that justify its existence. In the eurozone crisis, for example, its prescriptions for an early restructuring of Greek debt, faster bank reform and a slower pace of austerity have been more sensible than those expounded by the European Commission and the European Central Bank, other members of the “troika” that co-ordinates support for troubled EU economies.
Unfortunately, the prospect of more money being made available from the IMF’s own resources or in the form of G20 loans channelled through the fund has contributed to complacency in Europe. The presence of the IMF as part of the bailout programmes has given European leaders political cover for continuing to peddle ill-conceived, failing policies, delaying much-needed more sensible solutions to the crisis.
The IMF’s traditional prescriptions of structural adjustment, quick bank resolution, austerity and adjustment through exchange rates do not work well in the euro area, partly because of the lack of an integrated banking system, so that national banking systems and national sovereigns have become linked in a dance of death, and totally fixed exchange rates.
The eurozone’s current account (nearly balanced), trade account (mild surplus), overall fiscal deficit (manageable) or indebtedness (moderate), all indicate that its problems are internal, so solutions must necessarily come from within. Without political will in the eurozone, there is little outsiders can do to tackle the euro crisis. Or is there?
Historically, the IMF played a crucial role in several developing countries by pushing for urgently needed reforms for which the political will could never have been mobilised from within. This is the role it must play in the eurozone.
An external neutral arbiter such as the IMF can break the logjam. The failure to agree Europe-wide mechanisms for capitalising banks or providing funding guarantees to the banking system made sense for certain member states but was disastrous collectively. The harmful delay in the restructuring of Greek debt and EU leaders’ insistence on self-defeating harsh austerity measures also fall in the same category. The IMF must intervene to save the eurozone from itself.
The IMF eurozone programme must focus on addressing the worsening problems in Europe. The European Commission, the European Investment Bank and the ECB would be natural counterparts for the IMF providing fiscal, investment and monetary support respectively to facilitate necessary adjustments. Conditionality must then not only apply to countries such as Greece and Spain, but also to France and Germany and to EU institutions such as the ECB. The current asymmetric and incomplete adjustment plan for the eurozone, which focuses solely on the peripheral economies, is self-destructive.
Under such a strategy, the IMF must insist on allowing the European Stability Mechanism, the crisis fund, to directly inject equity into troubled banks and provide temporary funding guarantees. EIB resources must be doubled to drive an EU-wide infrastructure investment programme and the IMF should force EU countries to co-operate on imposing stringent anti-tax avoidance/evasion measures that will deliver a much-needed boost to revenues. The IMF must also overcome French and German resistance to a deepening of the single market in services. Last but not least, the IMF should demand a clear and credible road map for reforming the functioning of the eurozone.
Given its historical mandate on exchange rates, the eurozone is the natural counterpart for the IMF, not euro-area member states. Discussion of a single seat for the eurozone on the IMF board also follows this logic.
A successful eurozone-wide IMF programme would deliver a more symmetric method of restoring competitiveness, an EU-wide approach to stabilising the banking system, a greater focus on restoring aggregate demand, a deepening of the single market and a credible road map for the eurozone.
IMF, help Europe help itself.
Charles Goodhart, Professor Emeritus of Banking and Finance at the London School of Economics. and Sony Kapoor, Managing Director of the international think tank Re-Define