In past decades, the International Monetary Fund has had a potent reputation, especially in the developing world. In its programmes in Europe, however, the IMF has had to take a back seat to the desires of the European Commission and the European Central Bank, whose policies have thus far been less than successful. In light of this, Sony Kapoor makes the case for a eurozone-wide IMF programme, which would move away from the current piecemeal solutions focused on the economies of Europe’s periphery. He argues that a successful Eurozone-wide IMF programme would deliver a more symmetric method of restoring competitiveness, an EU-wide approach to stabilising the banking system, a greater focus on restoring aggregate demand, a deepening of the single market and a credible road map for the Eurozone

Kapoor, Sony

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24/07/2013A Eurozone-wide IMF programme could save bothblogs.lse.ac.uk /europpblog/2013/07/24/a-eurozone-wide-imf-programme-could-save-both/In past decades, the International Monetary Fund has had a potent reputation, especially in the developingworld. In its programmes in Europe, however, the IMF has had to take a back seat to the desires ofthe European Commission and the European Central Bank, whose policies have thus far been lessthan successful. In light of this, Sony Kapoor makes the case for a eurozone-wide IMF programme,which would move away from the current piecemeal solutions focused on the economies ofEurope’s periphery. He argues that a successful Eurozone-wide IMF programme would deliver amore symmetric method of restoring competitiveness, an EU-wide approach to stabilising thebanking system, a greater focus on restoring aggregate demand, a deepening of the single marketand a credible road map for the Eurozone.The IMF, historically the purveyor of crisis management for countries in financial trouble, is stuck in Europe. The IMFhas, as last week’s Charlemagne column in the Economist points out, become the junior partner in the ‘Troika’arrangement and is often over-ruled, as was clear from the leaked IMF report on Greece. It was not always so.The IMF is a body that is used to being in-charge. It has, over several decades, dictated policies to tens of countriesthat found themselves in a financial pickle. A visit from the IMF was an unpleasant experience and often involved aschool-masterly dressing down of a country’s policy-making elite. For example, this image of the then IMF ManagingDirector Michel Camdessus standing, arms folded, over Suharto, appearing to dictate terms on the bailout duringthe Asian crisis is burned into the collective memory of Indonesians. It was even credited with helping hasten theend of the dictatorship.President of the European Council Herman Van Rompuy, IMF Managing Director Christine Lagardeand European Commission President José Manuel Barroso Credit: francediplomatie (CreativeCommons BY NC SA)However, in its on-going programs in Europe, the IMF is often made to swallow humble pie. It has to agree to termsand policies dictated by a European Commission that knows little about structural reforms, bank restructuring andconditionality, and a European Central Bank (ECB) that has no business dictating fiscal policy. All of this might justbe acceptable, if the European Commission and ECB led ‘Troika’ programs were actually working, but they arefailing. Recent commentary that ‘the Eurocrisis is back’ is not accurate; the crisis had never gone away.1/4The longer the IMF remains embroiled in the Eurocrisis in this subordinated position, the more damage itsreputation and credibility, particularly with the all-important emerging countries, would sustain. But it is so deeplyenmeshed that it cannot just walk away leaving the Eurozone mess behind either. It is caught between two equallyunappetising options.Might there be a better way forward? Particularly, one which may work better for both the IMF and the Eurozone? Infact, there is. This involves deepening and broadening the Fund’s engagement with the Eurozone in a manner thatwill both put the IMF back in the driving seat and likely provide a systemic solution to the systemic Eurozone crisis.The piecemeal country level solutions that focus asymmetrically on troubled economies propounded so far havereached their limit.We need an IMF programme for the whole of the Eurozone . When Re-Define had first formally suggested this in2011 and then publicly called for it in the Financial Times, we were flooded with angry emails from the Europeanauthorities and governments, and sympathetic ones from the IMF, the US and emerging economies. Since then, thedeepening of the crisis, the divisions within the Troika that have been exposed, and mounting evidence thatadjustment needs to be slower and more symmetric, have all only bolstered our case.But is such a programme really necessary for the Eurozone? And will it actually work? The Eurozone is now stuck ina death spiral, as the failure to clean our banking system combines with unduly harsh austerity to choke the realeconomy. The record-high and still rising levels of unemployment, collapse of investments and dismal growthprospects have shrunk political space and endangered the social fabric in crisis economies. A continuation of flawedcurrent policies expounded by the European Commission, the ECB and perhaps most of all, Germany, will almostsurely take us over the brink. The question is no longer whether the next acute crisis will come, but more whatform will it take. Financial problems can be addressed, for example, by flooding the system with liquidity, but politicaland social breakdown would be impossible to reverse.Hence, a change in strategy is urgently needed and the IMF’s prescriptions have been sensible. Before the crisis,the IMF had come to be seen as a pariah by the developing world, but it appears to have learnt lessons from pastfollies. In the Eurozone crisis, for example, its suggestions for an early restructuring of Greek debt, faster bankreform and a slower pace of austerity have been better than those expounded by the European Commission and theEuropean Central Bank – the other members of the “Troika”. However, the IMF’s ideas have been ignored, even asEuropean leaders use its presence as political cover for continuing to peddle ill-conceived and failing policies.The IMF, with the support of the US, the G-20 and crisis Eurozone countries, needs to boldly propose a Eurozone-wide programme where it takes the lead and threatens to walk away if the Commission, the ECB and countries suchas Germany and France resist it. Some would argue that the Eurozone’s current account (nearly balanced), tradeaccount (mild surplus), overall fiscal deficit (manageable) or indebtedness (moderate), all indicate that its problemsare internal, so solutions must necessarily come from within. Hence, the IMF must play only a limited role. But thisargument portrays a fundamental misunderstanding of the IMF’s role. Historically, while the IMF’s resources havebeen important, its role in pushing for urgently needed reforms for which the political will could never have beenmobilised from within has been even more important.The Eurozone is struck in a political trap, where surplus countries such as Germany want to inflict the whole burdenof internal rebalancing on crisis economies. This must change and only an external neutral arbiter such as the IMFcan break the logjam. As I wrote in the Economist recently, creditor countries must share the burden of adjustment.An IMF programme for the Eurozone is necessary both because it will push for more sensible policies and becauseit offers a more balanced path to rebalancing. Charles Goodhart and I think that the IMF must intervene to save theEurozone from itself.How might such a program actually work?  The failure to agree Europe-wide mechanisms for capitalising banks thus far, or providing funding guarantees to the2/4banking system made sense for certain Member States, but was disastrous collectively. The harmful delay in therestructuring of Greek debt and EU leaders’ insistence on self-defeating harsh austerity measures also fall in thesame category. Having the IMF in-charge would mean fewer collective action problems. A system-wide view of thecrisis, which only the IMF can bring from outside, would be invaluable.As discussed above, an IMF programme would also bring a reversal of fiscal tightening, a more coherent approachto bank restructuring and a sharper focus on growth-enhancing structural reforms in product and service markets.Importantly, this would happen not just in crisis economies, but also in countries such as Germany, the Netherlandsand France, with positive spill-overs for the rest of the Eurozone. The European Commission, the EuropeanInvestment Bank and the ECB would be natural counterparts for the IMF providing fiscal, investment and monetarysupport respectively to facilitate necessary adjustments.Conditionality would not only apply to countries such as Greece and Spain, but also to France and Germany. Evenmore importantly, EU institutions such as the ECB will also be at the receiving end of conditionality that ought to askfor looser monetary measures targeted specifically at crisis economies. The current asymmetric and incompleteadjustment plan for the Eurozone, which focuses solely on the peripheral economies, is self-destructive and theECB/EC-driven fiscal tightening is wrong-headed. Under such a strategy, the IMF must insist on making sure theEuropean Stability Mechanism, the crisis fund, can directly inject equity into troubled banks and provide temporaryfunding guarantees. EIB resources must be at least doubled to drive an EU-wide infrastructure investmentprogramme and the IMF should force the EU countries to co-operate on imposing stringent anti-taxavoidance/evasion measures that would deliver a much-needed boost to revenues. The IMF must also overcomeFrench and German resistance to a deepening of the single market in services. Last but not least, the IMF shoulddemand a clear and credible road map for reforming the functioning of the Eurozone as a whole, perhaps by puttingforward a grand political bargain.Given the Fund’s historical mandate on exchange rates, the Eurozone is the natural counterpart for the IMF, noteuro-area Member States. Discussion of a single seat for the Eurozone on the IMF board also follows this logic, andthe programme would help bring that about. While the Eurozone is not a country and this may bring about legalissues, these obstacles can be overcome by having co-ordinated country level programs for Eurozone economies inthe first instance. The EC, EIB, ECB and ESM can all sign on to separate memorandums with the Fund in parallel.The successful Eurozone-wide IMF programme would deliver a more symmetric method of restoringcompetitiveness, an EU-wide approach to stabilising the banking system, a greater focus on restoring aggregatedemand, a deepening of the single market and a credible road map for the Eurozone. Last but not least, this may beone of the few remaining ways that the Fund can salvage its reputation and bolster support amongst non-Europeanmembers, while at the same time helping tackle the increasingly intractable Eurocrisis.Please read our comments policy before commenting .Note:  This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, norof the London School of Economics.Shortened URL for this post: http://bit.ly/18v0u4W _________________________________About the author3/4Sony Kapoor – Re-defineSony Kapoor is Managing Director of the Re-Define and a Senior Visiting Fellow at the LondonSchool of Economics. He tweets at @SonyKapoor. 4/4

A Eurozone-wide IMF programme could save both

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