Much of the blame for EZ crisis has fallen on Europe and ECB policymakers. IMF which is usually a key party to such crisis has been ignored.
Nor surprisingly, IMF has retained its record of worsening crisis in EZ case as well. Ngaire Woods of University of Oxford has a piece on the topic. IMF actually ignored six lessons this time:
One key lesson ignored in the Greece debacle is that when a bailout becomes necessary, it should be done once and definitively. The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations. In Greece, the problem is even worse, as the €86 billion ($94 billion) plan now under discussion follows a €110 billion bailout in 2010 and a €130 billion rescue in 2012.
The IMF is, on its own, highly constrained. Its loans are limited to a multiple of a country’s contributions to its capital, and by this measure its loans to Greece are higher than any in its history. Eurozone governments, however, face no such constraints, and were thus free to put in place a program that would have been sustainable.
Another lesson that was ignored is not to bail out the banks. The IMF learned this the hard way in the 1980s, when it transferred bad bank loans to Latin American governments onto its own books and those of other governments. In Greece, bad loans issued by French and German banks were moved onto the public books, transferring the exposure not only to European taxpayers, but to the entire membership of the IMF.
The third lesson that the IMF was unable to apply in Greece is that austerity often leads to a vicious cycle, as spending cuts cause the economy to contract far more than it would have otherwise. Because the IMF lends money on a short-term basis, there was an incentive to ignore the effects of austerity in order to arrive at growth projections that imply an ability to repay. Meanwhile, the other eurozone members, seeking to justify less financing, also found it convenient to overlook the calamitous impact of austerity.
Fourth, the IMF has learned that reforms are most likely to be implemented when they are few in number and carefully focused. When a country requires assistance, it is tempting for lenders to insist on a long list of reforms. But a crisis-wracked government will struggle to manage multiple demands.
In Greece, the IMF, together with its European partners, required the government not just to cut expenditures, but to undertake far-reaching tax, pension, judicial, and labor-market reforms. And, although the most urgently needed measures will not have an immediate effect on Greece’s finances, the IMF has little choice but to emphasize the short-term spending cuts that boost the chances of being repaid – even when that makes longer-term reforms more difficult to enact.
A fifth lesson is that reforms are unlikely to succeed unless the government is committed to seeing them through. Conditions perceived to be imposed from abroad will almost certainly fail. In the case of Greece, domestic political considerations caused European governments to make a show of holding the government’s feet to the fire. The IMF, too, sought to demonstrate that it was being as tough with Greece as it has been on Brazil, Indonesia, and Zambia – even if doing so was ultimately counterproductive.
The sixth lesson the IMF has swept aside is that bailing out countries that do not fully control their currencies carries additional risks. As the Fund learned in Argentina and West Africa, such countries lack one of the easiest ways to adjust to a debt crisis: devaluation.
The list of IMF’s stark failures in all these crises is only growing overtime. In EZ crisis, all these lessons must have been conveniently forgotten as after all much of IMF’s leadership has come from the European lands. Despite this the institution and its people retain their eminence and continue to be a major force in world political economy.