Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 19 August 2016

Hard truths for the IMF

It is to the IMF’s credit that they have an Independent Evaluation Office, and their recent report on the Eurozone crisis is highly critical of the IMF’s actions. The IMF’s own staff told them in 2010 that Greek debt could well not be sustainable, but the IMF gave in to European pressure not to restructure Greek debt. Instead the Troika went down the disastrous route of excessive austerity, and the IMF underestimated (unwittingly or because they had to) the impact that austerity would have. In the last few years we keep hearing about an ultimatum the IMF has given European leaders to agree to restructure this debt, and on each occasion the IMF appears to fold under pressure.

These repeated errors suggest a structural problem. Back in 2015, Poul Thomsen, who runs the IMF’s European department, said “we need to ensure that we treat our member states equally, that we apply our rules uniformly.” But that is exactly what the IMF has failed to do with the Eurozone and Greece. As Barry Eichengreen writes
“When negotiating with a country, the IMF ordinarily demands conditions of its government and central bank. In its programs with Greece, Ireland, and Portugal, however, the IMF and the central bank demanded conditions of the government. This struck more than a few people as bizarre.
It would have been better if, in 2010, the IMF had demanded of the ECB a pledge “to do whatever it takes” and a program of “outright monetary transactions,” like those ECB President Mario Draghi eventually offered two years later. This would have addressed the contagion problem that was one basis for European officials’ resistance to a Greek debt restructuring.”

We could add that, since the Asian crisis of the late 1990s, the fund have understood the dangers of taking actions which just favour creditors, but as part of the Troika it sits down on the same side of the table as the creditors.

As Eichengreen also notes, it is not as if the IMF have had problems demanding commitments from regional bodies such as African or Caribbean monetary unions and central banks in the past. The problem is much more straightforward. He notes that European governments are large shareholders in the Fund, and that “the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture.”

In other words we have something akin to regulatory capture. The IMF’s job is to be an impartial arbitrator between creditor and debtor, ensuring that the creditor takes appropriate losses for imprudent lending but also that the debtor adjusts its policies so they become sustainable. In the case of the Eurozone it has in effect sided with the creditors, and ruinous austerity has been the result of that.  


  1. IIRC Krugman was a little cagey on the issue when he wrote about it, probably didn't want to get his close friend in trouble, but it seems the story of Olivier Blanchard's tenure at the IMF (his initial support and later repudiation of economic arguments for depressionary austerity) could be used as another example of politics interfering with economics at the IMF.

    Then again, nobody should need to read between the lines when it comes to the EZ. The IMF shouldn't be involved in supporting the overthrow of a democratic government and the intentional destruction of a nation's banking system, like they did in Greece as part of the Troika, full stop. Once you pull that kind of stunt there's no way to ever again call yourself an economic stability organization: let's just call them Deutsche Bank's standover men from now on.

  2. I feel this feeds into your exploration of why expert economic arguments seem to have been disregarded. One could be very cynical about the reasons behind the leadership of the IMF adopting the stance that it did re Greece. Unfairly people wonder who gains by the advice, which can lead to false assumptions about lack of independence. The political presentation of Treasury figures by Osborne under the cover of independent advice can not help. Questioning expert advice becomes normal, being seen as politically not data driven. And so the "balance" of giving equal weight to both economic arguments by media.

  3. Great post, Simon.
    You and readers may be interested in this evaluation of IMF governance which I have done for the IMF's Independent Evaluation Office a while back, where the issues you raise were closely analysed and recommendations proposed

  4. 'In other words we have something akin to regulatory capture. The IMF’s job is to be an impartial arbitrator between creditor and debtor ...In the case of the Eurozone it has in effect sided with the creditors, and ruinous austerity has been the result of that.'

    The fact that you (and many, many other economists) are only saying this now, when it is 'safe' to do so, and not at the time (when it was obvious to almost everyone) is one of the reasons your opinions are mistrusted; there are degrees of regulatory capture and self-interested 'avoidance of stating the obvious' that most humans are perfectly capable of spotting.


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