IMF leaves eurozone and Greece with much to ponder

What has the International Monetary Fund actually admitted in its assessment of the first Greek bailout memorandum? Has anyone learned from the mistakes of the past and, if not, why? Does the admission of fault mean that the IMF will change its stance toward the eurozone? And, last but not least, who is the bad guy in the troika after all?

In a controversial report made public on Thursday, the Fund admits two fundamental errors. The first was that it seriously underestimated the consequences for the Greek economy of the austerity measures imposed by the eurozone and the IMF. The Fund now argues that a more lenient policy ought to have been pursued, especially from the end of 2010, when the level of the Greek debt was re-estimated and it became apparent that the recession would be much deeper than originally predicted.

The second was that the Greek public debt had not been sustainable from the start of the program and therefore ought to have been subjected to a writedown earlier for the policy mix to have had any chance of success. Let us not forget that success is defined as making Greek public finances sustainable once more and the country’s return to the markets. The IMF also argues – pointing the finger mainly at Europe – that threats regarding a Greek exit from the eurozone went a long way toward undermining the memorandum. The onus rests equally on the shoulders of the Greek political system and on German Chancellor Angela Merkel and ex-French President Nicolas Sarkozy. Nowhere does the IMF (or any rational person for that matter) argue that austerity was unnecessary.

And nowhere does the Fund say that the Greek deficit should have remained at 36 billion euros in 2009 (24 billion euros of which was a primary deficit), let alone increased through a growth-oriented policy.

Why didn’t the IMF impose its views at the start of 2010? Because none of Greece’s foreign lenders were prepared to bankroll such a huge deficit. To be precise, up until the end of March 2010, our partners were not prepared to pay a single cent for Greece’s rescue. As far as the so-called debt haircut is concerned, the reasons why it was not carried out are political or financial. Our partners, understandably, suspected that if they agreed to a writedown of Greece’s massive debt, then Greece’s politicians would not implement the terms of the memorandum. From an economic and political point of view, our partners had already spent trillions of euros in the 2008-09 period in order to prop up their wayward banks. In early 2010, the exposure of German and French banks to Greek state bonds was still at around 200 billion euros. A haircut of, say, 50 percent of Greek public debt, therefore would have meant Berlin and Paris being forced to give more money to their banks, an option that was out of the question for the citizens of those countries.

Unfortunately for us, though not surprisingly, our foreign partners continue to mistrust our politicians and continue to be reluctant to shell out more money in order to finance Greek deficits. This is why they persist with the strict austerity policy and would agree only to a gradual restructuring of the Greek public debt. Of course, the restructuring would be much smaller than many Greek political parties envision, given that the IMF has set it at 4 percent of GDP by 2020 and an additional 3 percent of GDP by 2022. Furthermore, we must also remember that almost all the Greek debt is currently held by our partners and the European Central Bank, making a restructuring even harder from a political point of view.

Nevertheless, the IMF’s insistence on a further restructuring of the Greek debt is important both for Greece and for the rest of the eurozone. It indicates the Fund’s intention to adopt a much more inflexible stance toward the eurozone and to stop being swayed by the political ambitions of Europe’s most influential governments.

Within this context, the IMF is expected to apply a lot more pressure for the restructuring of state (and bank) debts, which would have a significant impact on Greece and other countries in the eurozone currently under bailout deals, and Cyprus especially.

Meanwhile, a comparison between the political stance of the IMF and that of the Eurogroup shows, rather surprisingly, that the IMF is often prepared to adopt a more progressive attitude, while the Eurogroup comes across as being shockingly conservative and shortsighted both in its political and economic points of view. Any discussion on the European Commission’s stance would be almost irrelevant were it not that this was once the leading defender of the European Union’s interests. Unfortunately, however, the Commission’s role had been reduced significantly even before the onset of the crisis and has been limited since 2008 to merely carrying out the orders of the Eurogroup. It would be great if the Commission were to either take back its institutional role or at least acknowledge the reality of its position and stop being a part of the troika. This would allow it to protect the image of Europe in the eyes of the beleaguered citizens of the European south. It would be even better if the eurozone let the IMF design and oversee the implementation of the memorandums alone. The contribution of the Eurogroup and the Commission so far in the programs currently being implemented has been unfortunate, to say the least. They should let the professionals get on with the job.

In short, the first Greek memorandum was not a complete failure and the second one will not be either. Significant mistakes were made by all sides. Why the IMF did not insist from the onset on the restructuring of the Greek public administration, the streamlining of the civil service and the sell-off of state-owned companies is confounding. On the other hand, the failure of the governments of Costas Karamanlis in 2007 and then George Papandreou in 2009 to adopt austerity measures was negligent, if not criminal. Would that have spared us from the memorandum? Probably not, but the adjustment would have been much more contained and we would have had a longer period of time in which to achieve it (see Ireland).

The result of all of these mistakes has led to the biggest fiscal adjustment of a developed country in recent history (surely that is a success) coming at a much larger cost than necessary to the citizens. This is the biggest failure of both memorandums, but the onus lies with all parties, and foremost with Greece.