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Traditionally, “You should go to the IMF” was not
something you would say to friendly neighbours and
close allies.
Over the past few decades, the International
Monetary Fund became associated with excessive
fiscal austerity, extreme political insensitivity,
and – since the Asian financial crisis of
1997through1998 – with an out-and-out stigma.
Countries borrowed from the IMF only under duress,
when all else failed – and when there was simply no
other way to pay for essential imports. (For Iceland
in the fall of 2008, for example, the only
alternative to IMF financing was to eat locally
obtained goods, which mostly means fish.)
But the IMF has changed a great deal in recent
years, largely under the auspices of Dominique
Strauss-Kahn, its current managing director.
Strauss-Kahn, a former French finance minister and
contender for the Socialist nomination for the
French presidency, has pushed through changes that
allow the IMF to lend without conditions in some
circumstances and to give greater priority to
protecting social safety nets (including
unemployment benefits and healthcare systems). He
has also moved the Fund decisively away from its
obsession with fiscal austerity measures (a big
early mistake – with lasting traumatic consequences
– in Indonesia and Korea in late 1997).
Greece undoubtedly has serious problems today. The
great opportunities offered by European integration
have been largely squandered. And lower interest
rates over the past decade – brought down to German
levels through Greece being allowed, rather
generously, into the euro zone – led to little more
than further deficits and a dangerous buildup of
government debt.
Germany
and France – as de facto leaders of the European
Union–are haggling over a belated support package,
but they have made it abundantly clear that Greece
must slash public sector wages and other spending.
Greek trade unions know what this means and are in
the streets.
If
Greece still had its own currency, everything would
be easier. Just as in the case of the United Kingdom
since 2008, the Greek exchange rate would depreciate
sharply. This would lower the cost of labour,
restoring competitiveness (as in Asia) while also
inflating asset prices and thereby helping borrowers
who are underwater on their mortgages and other
debts.
But, with Greece and other troubled euro zone
economies (known to their detractors as the PIIGS:
Portugal, Ireland, Italy, Greece, and Spain) having
surrendered monetary policy to the European Central
Bank (ECB) in Frankfurt, their currencies cannot
fall in this fashion. So Greece – and arguably the
PIIGS in general – are left with the need to curtail
demand massively, lower wages, and reduce the public
sector workforce. The last time we saw this kind of
precipitate fiscal austerity – when countries were
tied to the gold standard – it contributed directly
to the onset of the Great Depression in the 1930s.
This is a situation tailor-made for Strauss-Kahn and
the “new IMF” to ride to the rescue. Since early
2009, the Fund has had significantly greater
resources to lend to countries in trouble, to
cushion the blow of crises, and to offer a form of
international circuit breaker when it looks like the
lights might otherwise go out. The idea is not to
prevent necessary adjustments – for example, in the
form of budget deficit reduction – but to spread
them out over time, to restore confidence, and to
serve as an external seal of approval on a
government’s credibility.
The IMF was created in the waning days of World War
II, essentially as a United States-Western European
partnership. Europe retains strong representation at
the Fund, and has always chosen its top leader – in
fact, most emerging markets (in Asia, Latin America,
and Africa) complain that Europe is overrepresented
and has far too much say in how the Fund operates.
Yet at this moment of growing European crises, while
there is still time to act, the Fund is confined to
the sidelines.
This is partly because German Chancellor Angela
Merkel, currently manoeuvering to ensure that a
German is the next head of the ECB, does not want
the Fund to become more involved in euro zone
policies. The IMF might reasonably take the position
that ECB policies have been overly contractionary –
resulting in a strong euro and very low inflation –
and are no longer appropriate for member countries
in the midst of a financial collapse. If the IMF was
to support Europe’s weaker economies, this would
challenge the prevailing ideology among Frankfurt
dominated policy makers.
But the real reason is much simpler. When French
President Nicolas Sarkozy put forward Strauss-Kahn’s
name to run the IMF, he meant to park a past and
potentially future rival in a faraway place about
which people cared little. Then the global financial
crisis hit, and Strauss-Kahn was propelled to centre
stage.
With France’s next presidential election fast
approaching in 2012, the last thing Sarkozy now
needs is for Strauss-Kahn to play a statesman-like
role in saving the euro zone. We can expect to hear
all kinds of misleading excuses from EU sources for
excluding the IMF: “Fund is too American,” “Europe
must resolve its own problems,” and “the IMF is not
appropriate for our circumstances.” Given the
magnitude of the Greek crisis, they will all ring
hollow.
Sometimes history is driven by deep forces beyond
our control and sometimes by sheer chance. And at
other times, like now, much that hangs in the
balance is affected by the deliberate, personal, and
short-term tactical considerations of people running
for election.
The EU’s leaders will try hard to keep the IMF at
bay. This is not good news for Greece or for anyone
who cares about global financial stability. |
