The Greek economic tragedy has damaged all those involved. That is also true of the International Monetary Fund (IMF). In May 2010, the IMF approved its biggest financial assistance program ever for Greece—no less than €30 billion—resulting in current Greek obligations of €21.2 billion to the IMF, though the European Union (EU) credits to Greece have been ten times larger.
No IMF program has failed more spectacularly. On June 30, Greece failed to pay back €1.5 billion to the IMF, leading to the biggest default in its seventy-year history. This was quite an embarrassment, not just for Greece, but also for such a highly professional organization as the IMF, which stands for fiscal responsibility. The IMF will now need to rethink its policy.
The IMF’s fundamental mistake lay in its adoption of its Greek program of May 2010. It was not only the biggest IMF program, but also one of the softest. Even earlier, Devesh Kapur and Arvind Subramanian complained that emerging market countries saw the IMF as Atlantic-centered and Europe-dominated, a “Euro-Atlantic Monetary Fund.” The IMF seemed to prescribe tough conditions for emerging economies, but soft ones with more financing for European economies.
Not only did the IMF and the EU allow Greece far too slow fiscal adjustment, they also permitted minimal structural reforms and very high public expenditures. Throughout the crisis, Greece has had among the highest public expenditures in Europe, ranging from 50-60 percent of GDP, according to Eurostat, the EU’s statistical office. Under such conditions, growth and increased employment were virtually impossible. The problem was too little early action.
The reasons for the IMF adopting such a soft and overly generous program were political. At that time, French socialist politician Dominique Strauss-Kahn was the Managing Director of the IMF and he seemed intent on becoming France’s President in 2012. It did not quite work out. Strauss-Kahn was the decisive force in the Greek agreement. He opposed harsh conditions that could have hampered his presidential ambitions. Needless to say, the Greek socialist government of George Papandreou agreed. The otherwise so technocratic IMF appeared captured in European political intrigues.
A novelty in the Greek crisis was that the IMF operated with two equals in a “troika” together with the European Commission and the European Central Bank (ECB). This has not been a happy marriage. The IMF is far superior in competence and procedures than these relative neophytes. The IMF is not afraid of getting “dirty” in fiscal policy, while the ECB as a central bank is rightly reluctant to make political choices. In Europe, the IMF is missing its traditional junior partner—the World Bank—that accepted to be subordinate and take responsibility for structural reform that the IMF thinks the European Commission has neglected. Most of all, the European counterparts slowed down the otherwise fast IMF.
As a consequence of the Greek default, the troika, with its diffuse collective responsibility, is bound to fall apart. The IMF is not allowed to disburse funds to a country that has not paid its debts due to the Fund, so it has to stay out of financing until Greece repays its debt. On July 20, Greece is expected to default on a repayment of €3.5 billion to the ECB, which would preclude further participation by the ECB, leaving the EU to handle Greece on its own.
The problem with the IMF is not that it has been too tough but that it has been too soft and subordinated. If the IMF had received its doubled resources, as its members agreed in 2010, it could have taken command.
The IMF needs to return to its mantra of “it’s mostly fiscal” after having tried to defend soft fiscal policies with claims about the size of short-term fiscal multipliers based on “cyclically adjusted” fiscal balances. How can anybody assess anything cyclically adjusted in a severe crisis? The traditional measure, the budget deficit as a share of GDP, can be measured far more reliably.
One effect of the Greek crisis is that the IMF is taking its debt sustainability analysis more seriously. On June 26, the IMF issued its up-to-date analysis in a manifestation of impressive transparency, explaining how dire situation is. Its essence is that the Greek debt is not sustainable. The most devastating assessment is that during the last thirty-five years Greek total factor productivity rose by only 0.1 percent a year, less than any other EU country. Most of the Greek growth came from EU subsidies, which is the heart of the crisis.
The IMF will henceforth demand early debt restructuring when it realizes that the debt burden is not sustainable. The Fund is now pursuing that course with regard to Ukraine. For Greece, the IMF implicitly advocates that the EU should write off a fair share of its debt. That makes sense, but debt forgiveness is usually conditioned on substantial structural reforms and fiscal adjustment that Greece so far has failed to carry out.
The Greek crisis shows that the IMF needs to go back to basics. It should have demanded more early structural reforms and fiscal adjustment and offered less financing. It should have defended its technocratic standards against European politics, as against any other politics. Yet, it does make sense to call for conditional public debt reduction to facilitate future growth. The IMF needs to learn these lessons and go back to basic fiscal responsibility.
Anders Åslund is a Resident Senior Fellow at the Atlantic Council’s Dinu Patriciu Eurasia Center.
Image: Greek Prime Minister Alexis Tsipras attends a Cabinet meeting at the Parliament building in Athens on February 21. Tsipras declared victory after agreeing to a last-minute conditional financial rescue deal with Europe, despite making big concessions to avert financial collapse within days. (REUTERS/Kostas Tsironis)