GEORGE PAPACONSTANTINOU

A symbolic farewell to the IMF

COMMENT

IMF Managing Director Kristalina Georgieva (r) welcoming Prime Minister Kyriakos Mitsotakis (l) to IMF Headquarters in Washington, DC on January 7.

TAGS: Economy

The announcement by Prime Minister Kyriakos Mitsotakis on the closure of the International Monetary Fund office in Athens following his recent meeting with the IMF’s new managing director, Kristalina Georgieva, had an obvious symbolic character: to mark the end of an era. The office opened in 2010, and in the popular mind it is identified with Greece during the period of the memorandums. And, as was also the case in other countries in similar situations, the presence of the Fund’s staff in our country (regardless of the personalities of the individuals involved) was never welcomed.

The IMF, of course, is not “leaving” Greece as such, first and foremost because it still remains its lender. Furthermore, even after the envisaged early repayment of the remaining loans, Fund staff will regularly visit the country in the context of the periodic evaluation of the economies of IMF member-countries (Article IV consultation). The results of this assessment are economically and politically important (as was the February 2009 report on the non-viability of the Greek pension system that was ignored) and are regularly followed by markets.

Nevertheless, the prime minister’s announcement is a good opportunity for an assessment of the IMF role during the crisis. To begin with, let us recall that its participation in the first Greek program was imposed by the German chancellor, despite the strong disagreement of the other Europeans, the Commission and the European Central Bank, not to mention the German minister of finance. It was related to the European institutions’ perceived weakness and lack of know-how in the face of an unprecedented crisis, but also to the chancellor’s political need to adopt a tough line on Greece. Following that, the IMF participated in all countries’ support programs.

In the overall assessment, there are both positives and negatives. On the plus side, in the design of the first support program, the Fund had a more realistic attitude than the Commission. With the Eurogroup pressuring the Commission for as short a period of adjustment as possible for Greece, the Fund helped us to finally agree on a five-year period (until 2014) to reduce the deficit to below 3 percent of gross domestic product. Its attitude toward debt was also positive: The IMF raised the issue of debt restructuring early (after the signing of the first memorandum however, not before), against a reluctant Commission and a strongly opposed ECB.

On the negative side one should note an often ideological bent toward promoting specific reform measures with a dubious economic impact. The focus, for example, foremost on the labor market and less on opening up the market for products and services ended up reducing nominal wages in the private sector (with a positive impact on international competitiveness), but not prices, thereby reducing real wages and purchasing power and deepening the recession (a large part of which was however inevitable).

The IMF (together with the other members of the troika) also failed in its macroeconomic projections and in terms of correctly measuring the impact of the program on economic variables. This is the well-known criticism about getting the fiscal multipliers wrong (the impact of fiscal consolidation on GDP), which the Fund has subsequently accepted. But beware: More realistic multipliers at the time would have meant more, not less, austerity. The adjustment period and the associated required fiscal measures stemmed from the maximum amount of funds creditors were willing to commit so as to keep Greece out of international markets.

The IMF has always had a difficult relationship with the rest of the troika and its involvement in Greece met with resistance, not least from its own board. In order to participate in the first Greek program, its then managing director had to convince the IMF board to change its statutes so that it could lend to Greece 30 times the Greek contribution to the Fund’s capital. Furthermore, it participated in the program even though it could not use two of its traditional adjustment tools: exchange rate fluctuation to absorb some of the pain of adjustment and debt restructuring for unsustainable debt. And as time went on, the IMF took a different position from the other troika institutions on many issues; as a result, its last disbursement was in 2014, while it chose not to participate in the third program.

In addition to funding, IMF staff have provided Greece with reports and technical assistance on public finance issues. Its 2005 report, for example, to the government of the time on the reform of the expenditure and revenue systems was unfortunately ignored rather than put to use, with the well-known disastrous fiscal consequences in the following years. In contrast, IMF technical assistance provided during the MoU years (beginning in 2010) significantly helped successive governments to modernize the country’s budget and revenue systems.

All Greek governments maintained a complicated relationship with the Fund, often simply reflecting the negative attitude of the public. On certain occasions, they used it as leverage against the position of other members of the troika in order to pursue specific policy goals; more typically, however, they preferred to align themselves with the European institutions, even on issues such as further (official) debt restructuring or the reduction in primary surpluses where the IMF’s position was closer to Greek interests. The reason: Our main creditors are European institutions, and the IMF’s role in the eurozone has now declined significantly.

And now “what’s going to happen to us without barbarians?” As Cavafy said, “These people were a kind of solution.” The IMF may have been demonized during the crisis, but it should be acknowledged that – together with the European institutions – it played a key role not only in preventing the total collapse of the economy but also in promoting reforms that should have been adopted by Greek governments years earlier. The stabilization part of the effort is now almost complete (albeit at an enormous economic and social cost); but the demand for a Greek-designed plan aimed at the radical transformation of the state and the economy remains today as necessary and urgent as ever.


George Papaconstantinou is a former minister and author of “Game Over: The Inside Story of the Greek Crisis.”

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