Why Not Unravel The IMF Too While We’re At It?

If you’re really good at making a pigs ear of things, why not join the EU? Of course, this is not meant as a piece of solid advice, rather it is a cry of frustration at being impotently forced to watch so many things done so badly, each in turn, and one after the other. Southern Europe’s problem is essentially a competitiveness problem, and not a fiscal one, and if many states have been having growing difficulty with their negative fiscal balances, this is a symptom of the problem, and not its cause. Even in the worst of cases – countries like Greece and Portugal – the rising recourse to fiscal outlays has been a response to lack of “healthy” growth, and the root cause of this continuing difficulty in generating real growth has been the underlying lack of competitiveness, and the inability to export your way out of trouble once the burden of debt starts to rise, so simply pruning the fiscal side isn’t going to cure the problem, and by now that simple point should be obvious, I would have thought.

Naturally a lot of financial markets attention has been focusing recently on whether or not the Euro is about to unravel. Even the ever-so-prudent Ralph Atkins winds up his mamoth “Defiant Berlin” review with a quote from Jörg Krämer, chief economist at Commerzbank in Frankfurt who says the next few years may see the eurozone becoming more of a “transfer union”, one in which better performing countries have to help out weaker members. “That” – he argues – “could mean Germany says, ‘we are no longer willing to support the weaker parts of the EU’, while the Greeks say that they are not prepared to have policy dictated by the Germans,” Thus: “The risk cannot be totally excluded of a eurozone break-up within 10 to 15 years – and this is a consequence of widening eurozone divergences.” To which Atkins adds “If that risk rose, Europe would be facing a very different ballgame”. You bet it would!

To some extent I cannot help feeling that a congenital inability to take bite-the-bullet type decisions is resulting in an ongoing process of passing the buck ever onwards and upwards. The latest exemple here is the issue of IMF involvement in the Greek adjustment process. Now, as with any issue, there are good reasons and there are bad reasons why IMF involvemnet might be considered desireable. Among the good reasons are the vast experience and technical expertise of the fund, or the fact that representatives of the IMF might find it easier to say “no”, given that the underlying sovereignty issues are not exactly identical when posed in terms of the IMF as they are in terms of the EU.

But among the bad reasons would be the idea that the IMF could fund any eventual Greek loan more cheaply. As far as I can see, a lot of the EU interest in having an IMF loan to Greece stems from the need to make the rate of interest applied cheap enough to bring the spread down. This is an important concern, since it is not obvious why a country which is making its best effort to put things straight should need to be paying an exorbitant charge for the money it borrows while it does this. Earlier this week European Central Bank President Jean-Claude Trichet spoke out strongly against offering the kind of low-interest loans for which the Greek government has been pressing – “There shouldn’t be any subsidy element, no concessionary element” in any eventual loan to Greece, he told members of the Economic and Monetary Affairs Committee of the European Parliament. And maybe this is the only reasonable position the ECB can take (given its Charter), but evidently the Eurogroup of countries are not bound by the same constraints and they themselves could do this (via recourse to Group-backed EuroGroup bonds, or whatever), which raises the obvious question: why don’t they?

Well, one of the reasons lying behind all the reluctance we are currently seeing may not be the issue of the German constitution, or even the question of changes to the Lisbon Treaty, or any of the major issues of principal which arise and would require lengthy and onerous debate. Maybe the question is a much more simple one: perhaps Europe’s leaders are simply worried that if they make a cheap loan to Greece, then Spain, Portugal, Ireland, Italy, Austria, Slovenia and Slovakia may all soon argue they also need one.

My view is that this is an issue where the EU itself needs to bite the bullet, and make large changes, ones which lead, as Wolfgang Munchau has been arguing, to much closer political union. If we need the IMF in Greece, and I think we do, it is for its proven capacity to implement programmes, and its extensive technical resources, NOT for the money.

Indeed the Indian economist Subroto Roy just raised a very important issue in this regard on my Facebook. If IMF funds are used to bailout Greece, wouldn’t that be a bit like the poor pampering the rich. Shouldn’t IMF money be being used for other things? Shouldn’t the IMF have other priorities? Evidently stabilising Europe is important, but shouldn’t the EU be doing that (and not just as a matter of pride, as a matter of international solidarity)? As Roy asks, what happens if…

“the US, Britain, ANZ and everyone else in the IMF who is not in the Eurozone…. (decide to)… legitimately ask why the effective subsidy of Greece by its Eurozone partners should be transferred to the rest of the world … (after all) …. the Europeans have enough clout in the IMF to, say, insist some of their own IMF-directed resources be directed towards Greece specifically, which would spell the unravelling of the IMF if it became a general habit.”


On a slightly different, but somewhat related topic, I basically agree with a lot of what Martin Wolf wrote in his Excessive Virtue piece in the FT yesterday. As Martin points out, in saying “nein” to those who suggest that its economy should become a little less competitive what the German government is effectively saying is that the eurozone must become some kind of greater Germany – a huge export machine which generates a massive surplus with the rest of the world, a surplus which enables all those highly indebted member countries to pay down their debts. But, as Wolf argues, this policy would have profoundly negative implications for the entire world economy.

He cites the German secretary of state Ulrich Wilhelm, who, in a letter to the FT, argues that:

“The key to correcting imbalances in the eurozone and restoring fiscal stability lies in raising the competitiveness of Europe as a whole. The more countries with current account deficits are able to increase their competitiveness, the easier they will find it to decrease their public and foreign trade deficits. A less stability-oriented policy in Germany would damage the eurozone as a whole.”

This worries Wolf, who argues that Mr Wilhelm is inviting everybody to join a zero-sum world of beggar-my-neighbour policies in which every country tries to grab market share from the rest (strange how all of this sounds very similar to the way things wound up back in the 1930’s, now isn’t it?). As he suggests, at a time of generalised global weakness, this is a self-defeating recommendation for both the eurozone and the world. If we take a look at Japanese exports, which after an initial surge, are basically now near enough to being stationary, it is obvious that deficient aggregate demand in Europe is now part of the problem:

And obviously with all the fiscal pruning and “good housekeeping” we are now about to see, this problem is set to get worse, not better. Being well apprised of the problem Wolf then goes on to put forward an alternative:

“An alternative solution might be to help the world absorb larger export surpluses from the eurozone, the US, Japan and the UK. True, no sustainable exit from the present quagmire can be envisaged without increased net capital flows into emerging countries. It also seems evident that this is where the world’s surplus savings ought to end up. But it is going to take time and much reform to make this happen.”

Really, I entirely agree, but a quantum leap in thinking is necessary here. If the books are to balance – and if we want growth and pensions in the OECD then they have to – what we need to do is help cheaper finance reach those countries with capacities to grow and absorb others exports, while the EU takes on in-house responsibility for sorting out the financing (but not necessarily the disciplining) of its own members. That is, if cheap loans need to be provided to anybody it is to those in need in the Emerging Countries, and not to Europeans who have happily spent their own way into difficulty.

In fact, in my New Year questions to Paul Krugman I raised some sort of similar point, but unfortunately his response was not exactly positive.

E.H.: One of the standard pieces of economic observation about countries recovering from financial crises is that their recoveries are export driven. This has now almost attained the status of a stylised fact. But as you starkly ask, at a time when the financial crisis is generalised across all developed economies – whether because those who borrowed the money now have difficulty paying back, or those who leant it now struggle to recover the money owed them – to which new planet are we all going to export? Maybe we don’t need to look so far afield. Many developing economies badly need cheap and responsible credit lines, and access to state-of-the-art technologies. Do you think there is room for some sort of New Marshall Plan initiative, to generate a win-win dynamic for all of us?

P.K.: Um, no. Not realistically as a political matter. We’ll be lucky if we can get the surplus developing countries to spend on themselves. My guess is that our best hope for recovery lies in environmental investment: taking on climate change could, in terms of the macroeconomic impact, be the functional equivalent of a major new technology.

So the solution to our problems is not politically realistic. And meantime we keep trying to play around with policies which simply won’t work. It is now pretty clear to me at least just how so much valuable time was lost back in the 1930s, thrashing around playing with solutions which didn’t, and wouldn’t, work. As Krugman himself likes to say, “history has a habit of repeating itself, the first time as tragedy, and the second time as yet another tragedy”.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

23 thoughts on “Why Not Unravel The IMF Too While We’re At It?

  1. THe present depression in Latvia is much much much worse ar Depression in 1930-ies. In winter 1932/1933 in Latvia there were 60.000 unemployed, during the agricultural season the number fell to 20.000.

    Today Latvia has 230.000 unemployed, and the number is growing 11.000 a month.

    The population size is the same!

  2. Mr. Hugh, I understand you mostly focus on European matters since that’s the raison d’etre of this site and your own personal blog eurowatch, but since you mention him, what’s your take on Krugman’s recent call for a 20% tariff or whatever on Chinese imports into the U.S. (Which very much brings to mind 1930s policies.)

  3. You’re probably right that lack of competitiveness of southern europe is the problem in the imbalance in the union. But when the greek labour force that retires at 61(some groups even before 60) starts working to 67 like their german counterparts, then we’ll talk about improving the other issues (competitiveness, fiscal policy, etc). You can’t be competitive if you’re lazy! That’s a contradiction that runs right at the heart of the open market system.

  4. What do you mean for “healthy” growth? It’s quite apparent that not all countries can export their problems at the same time let alone devalue (US, Japan, China and EU would like lower currency but they cannot all of them…at the same time) or reallocate easily between tradeable and non-tradeable sectors. This issue of competitiveness is a non issue because it cannot be solved unless tradeable and non tradeable sectors face restructuring and reallocation of resources (including cheap credit). That’s not going to happen in the short term. So at present it’s just fiscal responsibility and fiscal problem of Southern countries: governments’ expenditure is unproductive and it does not help any healthy growth. Take Italy for example.

  5. Everyone is trying export oriented recovery strategies because it lets their local corporate parasites business leaders get away with policies like this:

    in cash terms, national income has risen $200 billion since the depths of the recession in March 2009. But corporate profits have risen by $280 billion over that period, while wages are down by $90 billion. … In Britain, national income rose $27 billion in the last two quarters of last year. Profits were up £24 billion and wages just £2 billion.


    Propping up domestic demand would mean reversing those ratios: directing the bulk of the economic surplus to employees rather than executives. And that, of course, is politically impossible in countries where executives run the government.

  6. nobody forces Southern Europa to buy all this stuff from Germany. Don’t blame the Germans, blame Southern Europe. Or they become more competitive or they should buy less stuff on credit.
    Some countries like a stable and strong currency. And because the Anglo-saxon world does not appreciate that, they put all the blame on Germany.

  7. I have a slightly different question. Why would the IMF want to get sucked into a situation where it cannot deal directly with Greece, but must instead negotiate with Germany, and where its normal advice to a country in Greece’s situation would probably include devaluation. Why would the IMF want responsibility without power?

    Euro membership has been one of the enablers of the continuation of the Greek deficits. Without the Euro, this situation would have blown up much sooner and have been resolved sooner. Why would the IMF want to get sucked into a situation where in effect Greece can play it off against Germany?

  8. Thanks!!!! Finally someone is pointing out that this program should not be financed by the IMF, not only from a European perspective, but from a global one.
    I couldn’t agree more with the economist from India.

    In the future, there is no way that we can deny, if we take the concept of equal treatment in the Fund serious, any member access to Fund resources. While there may be a bop need in the case of Greece, it is certainly not in foreign currency. Moreover, if Greece looses access to markets I would expect at least some private sector involvement – that is bondholders have to take haircuts. If the Europeans dont want it, fine, but then don’t go to the Fund.

    By the way, 2 myths are worth commenting on: First, the IMF has the technical expertise for such a program: The adjustment in Greece is not technically demanding, but politically. And it is not clear to me why the IMF should handle that better than the EU.
    Second, the IMF was a successful crisis manager. Remember Argentina or Ukraine – when public solvency was at stake, sometimes IMF programs can or did end in tears.

    With an IMF led bail-out of Greece, we change the global financial architecture far more than most people recognize, because there will be no limit for the use of Fund resources anymore. All countries outside the Eurozone should vote this program down.

  9. It is several years too late to have regrets about the situation of Greece. Most of the countries of the Club Med should not have entered the Euro in the first place. With growing imbalances accumulating since way too long, a painless solution is not an open option anymore.

    The Kanzlerin Merkel has refused to bail out Greece probably because, as you point out, “Spain, Portugal, Ireland, Italy, Austria, Slovenia and Slovakia may all soon argue they also need one.”. That seems an excellent reason to me. However, I fail to see how biting the bullet of an European Economic Government thru a much closer political union could solve the problem. Since decades, Eurogagas have summoned these concepts high and loud, but never explained precisely what these fine words covered.

    “European economic government”, “much closer political union” and “co-ordination of European economic policies” are magical words whose main purpose is to obfuscate the meaning of what would happen if they were to come to existence.

    Mainly, that would mean transferring large amounts of money from Germany, Netherland, France and Northern Europe to the southern Europe countries.

    The bail-out that was proposed would have resulted into transferring large amounts of money from Germany, Netherland, France and Northern Europe to the southern Europe countries.

    The “much closer political union” is lipstick on the bailout pi(i)g. As has often been the case in the European project thus far (but probably won’t be the case anymore), a dangerous but nicely packaged idea is sold by daydreaming élites to distracted citizens who discover too late its real consequences (the gap between Europhiles promises at the launch of the Euro and the subsequent, sorry reality is a remarkable cas d’espèce which will be difficult to surpass).

    We indeed are in a situation similar to the 30s, with debt, collapsing demand and overcapacity. The dreadful numbers quoted by Curmudgeon go a long way of explaining why. As Germany will unfortunately find out, a wine merchant who makes very good business in a place where half of people are alcoholic is due for an unpleasant surprise when the doctor (or the banker) forces a change of habit of his customers. Germany will then wake up to what can be, I think, the one and only way out that we have, and which is hinted at in your article.

    We need a collapse of the Euro. At least, parity with the dollar or, even better, back to the good old Duisenberg days of $0.8. Like in the 30s, the countries who will get out best (or least bad) of the present situation are the ones who manage to devaluate more than the others. If it looks immoral, that’s probably because it is.

    Consequently, the best possible outcome is the continuation and the expansion of the present Southern Europe – Brussels drama. If the euro seems likely to disappear in the next future (which seems to rapidly become the belief of the punditocraty), then it will continue to fall, for the best interests of European companies, manufacturers and citizens. And it may even survive.

    As an aside, a revolt against IMF support to Greece seems unlikely. The old powers are probably still strong enough to impose their collective will. However, the perception of IMF among the strongest emerging countries will continue to change, possibly moving towards indifference, and later irrelevance.

  10. @mirakulous

    Not that it matters a lot in the context of this discussion, but I’m sick and tired of misinformed foreigners expressing an opinion about the ‘laziness’ of the Greeks in general.

    You have to separate the public from the private sector. I entered the private sector in the 80s and since then the retirement age for me was at 65 with a minimum of 35 years of work. Most studies also show that employees in the private sector work longer hours in Greece than their Northern European counterparts (and having worked for multinationals I can attest to this fact), with less benefits, no or minimum overtime, smaller average salaries and less employment protection.

    People should get the facts right before expressing opinions such as yours. Raising the retirement age for private sector employees will just mean an increase in the already huge number of unemployed people in their fifties and sixties who will never get a pension because they can’t find work.

  11. If I understand correctly Edward and some commentators deem Greece and other EU countries ineligible for IMF funding. But if this is so, should Greece keep contributing to the fund? Because, OK, it is not a poor country, but it also isn’t the kind of a world power that should be paying regardless just for the shake of global stability.

  12. I think the issue of IMF or not lies with the track record of IMF. Basically you can say “IMF giveth and IMF taketh away”. In other words, they will come up with a package with strings, and if the strings are not adhered to, the funds stop flowing. The fear in Northern Europe is, that if EU were to undertake the same role, it would be the start of a slippery slope, which leads to transfer of tens of billions of EUR to Southern Europe every year, forever, because Europe will lack the ability to stop once it has started. Note that it is all the federalists that are advocating an EU solution, because they want to use this situation to kickstart United States of Europe.
    And Edward, you have been expressing the opinion lately, that we should move to more integration, because it would be the less painful route. I simply cannot see how that solves anything. On the contrary it would just institutionalise and perpetuate a rotten system. I am not saying that a common currency is necessarily a bad idea, but the current version was born with serious defects, and a long line of mistakes since the inception has simply made the situation impossible. Kill it off, re-introduce the old currencies, clean up the mess and then we can start talking about the project all over again, BUT with a few very expensive lessons learned.

  13. Nikos, you’re right. Private and public sector should be differentiated. I was referring to public. They’re part of the budget deficit thats why.

  14. Nikos is right. Lots of people in Greece work double and triple jobs. Part of the problem is an anti-protectionism, e.g. buying something from abroad that is expensive is ALWAYS preferred to stuff developped at home, without even bothering to compare. Happens in the public sector, also in some private sector. A second issue is that you cannot have some common policies and some individual ones. Greece could probably get more help from a single political move that will require NO money at all: Just introduce a common EU army, commited, above everything else, to protecting the borders of Europe, from Reunion and the Falklands, to Perehil and the greek islands.

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  16. Just out of curiosity; how would an EU army help the greek budget deficit? And most importantly in the mind of EU leaders and the market, how would this ensure that the greek government won’t cook the books again?

  17. @mirakulous

    Pls. check Greece’s military spending as a % of GDP (mainly to the US and Germany), Greece’s geopolitical situation, who is on Greece’s eastern borders and Greece’s geographical position with respect to gates of entry of immigrants to the EU. Doesn’t take much to get the correlation does it?

  18. @NikosR

    That is it. When Germans are catched by hand with evidence that German trade surplus is mainly based on unprecedented gargantuan unlimited bribing in their trade destination countries, they will still continue their KKK mantras.

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