Note: This piece has been built on Re-Define's public call for an IMF programme for the Eurozone as published in the FT in 2012.
The IMF, historically the purveyor of crisis management for countries in financial trouble, is stuck in Europe. The IMF has, as today’s Charlemagne column in the Economist points out , become the junior partner in the ‘Troika’ arrangement and is often over-ruled, as was clear from the leaked IMF report on Greece. It was not always so.
The IMF is a body that is used to being in-charge. It has, over several decades, dictated policies to tens of countries that found themselves in a financial pickle. A visit from the IMF was an unpleasant experience and often involved a school-masterly dressing down of a country’s policy-making elite. For example, this image of the then IMF Managing Director Michel Camdessus standing, arms folded, over Suharto, appearing to dictate terms on the bailout during the Asian crisis is burned into the collective memory of Indonesians. It was even credited with helping hasten the end of the dictatorship.
Many of you have noticed that Re-Define has been apparently missing in action having not sent out comments, given interviews or published papers or Op-Ed’s on the Eurocrisis or Financial Reform since the beginning of March. This was deliberate. It’s not that we have stopped working on these issues, far from it. It’s that we decided it would be healthy for us, given our sharp, but constructively critical tone, to stay away from the headlines for a bit.
Given the premature complacence that was creeping into policymaking circles, we got heat for continuing to insist the problems were far from over. For example, we were criticized in some quarters for being too negative at the last European Council in March when we said “This European summit reeked of missed opportunities, premature celebration and undeserved backslapping. This may come back to haunt our leaders sooner than they think.” (2nd Mar)
Note: This is the first part of my Essay \'For Europe, High Stakes in Greece\' that has just been published by the American Prospect this week. The recent decision on the Greek referendum adds a special relevance to this article.
The problems of the Euro turned critical when the Greek government nearly defaulted in May 2010 and the International Monetary Fund and European Union agreed to a bailout. In truth, the 17-nation Euro area had deep troubles long before that. Its oversized and undercapitalized banks, its common monetary policy but diverse and fragmented fiscal policies, the persistent economic imbalances among its members, and a cumbersome decision-making structure all made the Euro area economy vulnerable. The crisis, which still unmistakably bears the mark of the Greek tragedy that first set it off, has now spread far beyond Greece.
The Euro was created for normal times, but the EU had no good mechanisms for crisis management. At every step of the Greek drama, policymaker responses have remained behind the curve of economic deterioration. Slowly but surely, this erosion of confidence ensnared other countries, such as Ireland and Portugal, then spread to Spain and Italy, both widely perceived to be fiscally vulnerable. If European leaders cannot resolve Greece’s problems, they can hardly save the much larger economies of Spain and Italy.
Having brought Europe to the brink, EU leaders must now pull us back. They face the near impossible challenge of meeting the sky-high market expectations while operating within severe financial, political and time constraints, all of their own making. They owe it to Europe to pull a rabbit out of the hat now, but are incapable of pulling this off.
The economic problems facing the Eurozone were big but solvable within the political space available. With procrastination problems have grown and pettiness and parochialism has shrunk political space to a point where sensible economic decisions no longer seem possible. Bad politics has driven bad policy which in turn has made the politics even more fractious. For the sake of Europe, our leaders must act now or die (politically) trying.
The Euro area now has a systemic crisis. It is no longer possible to believe that the crisis is limited to the peripheral countries with Spanish and Italian borrowing costs staying high after having breached levels not seen since the birth of the Euro. August also saw questions being raised about the sustainability of French public finances and growth came to a dead halt. September has seen doubts being raised about the soundness of EU banks. Germany can no longer pretend that it does not face a domestic problem now that upheavals in the Euro area have, led to a collapse in German growth.
Unfortunately many sensible things such as reducing the stock of Greek debt, forcing greater and faster recapitalization of EU banks and introducing a bigger and more flexible design for the European Financial Stability Fund and the European Stabilization Mechanism from the outset were rejected by the European Commission, the European Council or the European Central Bank, sometimes all the institutions at once.
This unwillingness and inability to make sensible choices has led us down the wrong fork in the road and is directly responsible for the crisis having morphed from being a containable crisis in the periphery to one which has now infected the core and become systemic. Enormous damage has already been inflicted on large swathes of the EU economy and will cost EU tax payers dearly. Many jobs have now been destroyed, some permanently and the handling of the crisis has done lasting and irreparable damage to the European project. It is now no longer possible to say with certainty that the Euro or even the European Union itself is safe.