Abstract
Reviewed by: Thomas A. Bernes (tbernes@cigionline.org ), Centre for International Governance Innovation
Since 2010, with some brief pauses, the Eurozone crisis has been regular fodder for global financial news. Paul Blustein, a highly respected former journalist, has written a valuable book for those seeking to understand these events in Europe. Having published extensively on trade and international economic policy, Blustein combines rigorous research with an engaging writing style. His latest book takes a slightly different approach than others by focusing on the role of the IMF in addressing the crisis. He concludes that the actions of the Fund were a “travesty” because it became subservient to Europe—a harsh judgement to which I will return.
The book focuses primarily on the Eurozone crisis that affected Greece, Ireland, Portugal, and Cyprus. It does not touch on the role that the Fund played in 11 Eastern European countries in responding to the 2008 global financial crisis. The IMF has generally been credited with playing a useful role in helping this second group face its challenges. This is important to note, as it stands in contrast to the criticisms many analysts (including Blustein) have advanced in looking at the Eurozone crisis.
In approaching the topic, the author places Greece at the centre of the story, with over half of the chapters focused exclusively or mainly on that country. Ireland and Cyprus receive some coverage, and Portugal, Spain, and Italy very little. It is unclear whether this focus is due to particular issues unique to Greece, or simply to the availability of documentation and/or sources.
The book’s argument generally reflects the view that the IMF demanded excessive fiscal austerity from programme countries, particularly Greece, and failed to force a necessary reduction of Greece’s debt, sending Greek economic growth into a tailspin. The IMF is also criticized for acquiescing in Ireland’s bail-out of senior bondholders, leaving the Irish taxpayers with a huge bill. This narrative may prove correct, but the decisions made at that time involved questions of judgement in the midst of a crisis—that is, when all facts could not be known with certainty.
Concern about the risk of precipitating even greater financial instability dominated European thinking. It must be noted that this policy approach was also supported at the time by the USA and the UK.
The author supplements other studies by providing rich new details, including attempts by the IMF to focus more broadly on Eurozone issues (notably banking union) and to develop a plan B (debt write-off) to address Greek debt.
The major focus of the author, however, is on the IMF itself. Here, Blustein expresses a profound concern that the IMF became a junior partner in the so-called troika (with the European Union and the ECB), which negotiated with the Eurozone programme countries and allowed itself to be overly influenced by European views. In so doing, it was “laid low,” as the title suggests.
It is clear that the IMF did make mistakes, as its own post-mortems have shown. As illustrated by the author, these can best be broken down into errors of analysis and judgement, European political interference, and governance failures in the IMF itself.
Concerning errors of analysis, the IMF has acknowledged that its forecasts were overly optimistic, which, in the case of Greece, justified the huge deficit-reduction targets, leading to one of the largest economic contractions ever recorded and a rising debt-to-GDP level. But at the time, there were vigorous internal debates within the IMF, as the author himself details. The biggest failure may not have been the projections, but rather the inability to grasp the lack of institutional capacity in Greece to bring about the major structural changes required. The author tends to view the IMF as a technocratic philosopher-king, which, if it had only been left alone, would have brought divine wisdom to these economic challenges. Yet his own evidence demonstrates the active internal debate within the IMF.
So, was the chosen policy course due to excessive political interference by the Europeans? The overrepresentation of Europe on the IMF’s decision-making executive board is well known. But the USA and other chairs could have stopped the programmes had they fundamentally disagreed with them. Was it then a result of the operation of the troika? Again, Blustein’s evidence brings out examples of where the troika adopted IMF views against the initial thinking of the Europeans. Was it a problem of having a European managing director? Again, the author shows how both Dominique Strauss-Kahn and Christine Lagarde fought to change European views at times. It is not demonstrably clear that these IMF governance failings led to the programme failures.
Another key governance issue forcefully brought out in the book was the lack of transparency by staff in attempting to sneak through the executive board a fundamental change to the Fund’s framework for granting “exceptional access” to its resources. As their proposed programme for Greece did not qualify under the existing policy, staff proposed to change the policy to allow for exceptions when broader “systemic” issues were in play. What, in my view, was at issue here was not so much the exception, on which views differ, but rather the blatant disregard for transparency on the part of staff and management. The proposed change was discovered, almost accidently, during the discussion at the executive board.
Overall, despite the book’s title suggesting the IMF was made subservient to European views, Blustein’s study presents a nuanced picture. It identifies the Fund’s failings, but also brings out its strengths. It underlines the complexity of the broader financial stability concerns that existed at the time; it highlights the challenges of a variety of institutions working together; and it underscores the important governance challenges facing the IMF. In sum, the book provides future examinations of these issues with much to consider.