This post was published by the Peterson Institute and by Bruegel on their respective blogs.
The International Monetary Fund’s involvement in the euro area crisis has raised a lot of controversy. According to a widespread conventional view, the “Troika” of creditor institutions—the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB)—demanded excessive fiscal austerity of Greece and other errant countries in return for their assistance, and this stance not only failed to restore Greek public credit but also prolonged economic weakness in other countries, including Portugal and Italy. Instead of calling for austerity, according to this view, the IMF should have forced a reduction of Greece’s debt (in other words, engineered an orderly default) from the start of its involvement in the spring of 2010. The IMF is also blamed for ignominiously forcing Ireland to bail out senior bondholders of its failed banks in November 2010 under orders from a dogmatic ECB, itself captured by European financiers.
An educated and comparatively nuanced version of this storyline was masterfully told by Peter Spiegel, then the Brussels bureau chief of the Financial Times, in a 3-part reporting series that was later published as an ebook titled How the Euro Was Saved. A less well-informed version of the same critique is voiced by Nobel Prize laureate Joseph Stiglitz in his recent book The Euro: How a Common Currency Threatens the Future of Europe, variations of which inform opinions on the euro area among (too) many observers in Europe and globally.
Paul Blustein’s useful new book, Laid Low: Inside the Crisis that Overwhelmed Europe and the IMF, at the same time propagates and debunks the conventional wisdom. This ambiguous contribution reflects how far we still are from a settled reference narrative of the euro area crisis. Blustein, a former Washington Post and Wall Street Journal economics reporter, is one of the world’s most seasoned journalistic observers of the IMF and now works for the Centre for International Governance Innovation (CIGI), which is also the book’s publisher. The book’s unique perspective is to observe the euro area crisis through the lens of the IMF, an important though ultimately peripheral protagonist. This leads Blustein to analyse two separate but interconnected issues, the crisis itself and the IMF’s performance in addressing it.
In several ways, Laid Low follows the standard, formulaic, Greece-centered account of the crisis. More than half the book’s chapters are entirely or mostly about Greece. Some major non-Greek episodes involving the IMF, such as the assistance program for Portugal, are near-entirely omitted. The introductory second chapter (chapter 1 being a digression on Strauss-Kahn’s sexual issues) and the concluding chapter 20, as well as the book’s title, embrace a narrative of the Fund “laid low” by abusive political interference from Europe that prevents it from fulfilling its technocratic mandate with philosopher-kingly integrity. Here Blustein refers to an IMF “bruised and enfeebled,” its “credibility sapped” by yielding to Europe’s masters. “One word aptly describes the IMF’s role as junior partner in the Troika: travesty,” he writes in his conclusion.
But in the 17 descriptive chapters between introduction and conclusion, Blustein’s chronicle is too honest to support this indictment. His storytelling is highly engaging, and his reporting is superb. Not only does he bring together an astonishing variety of sources (journalistic, policy, academic), he also adds a number of scoops of his own. For example, he reveals how Strauss-Kahn attempted in April 2011 to walk away from the assistance program for Portugal, which was then being negotiated, unless it included conditions on euro area policy in addition to those on Portugal. (Wolfgang Schäuble, Germany’s finance minister, called Strauss-Kahn’s bluff.) Such new information is significant, since one of the more compelling criticisms made of the IMF is that it never insisted on euro area–level conditionality, an option that is not set out in the IMF’s formal tools but conceivable in the negotiation of individual programs. In the same vein, Blustein reveals that in the fall of 2012, IMF staff had wanted to include direct recapitalization of Cypriot banks by the European Stability Mechanism, a newly-created euro area fund, in the forthcoming assistance program for Cyprus, but that the IMF did not insist on it when EU leaders expressed their reluctance in late 2012.
Against the conventional critique, Blustein demonstrates that, while Strauss-Kahn did envisage a restructuring of Greek sovereign debt in the spring of 2010 (an option known in IMF lore as “plan B”), it was never a genuine option, not least because of the opposition of the Greek government itself. IMF staff was divided on the principle of restructuring, with some departments (e.g. Research and Strategy) maintaining that it would be eventually inevitable and others (most notably Europe and Fiscal Affairs) arguing it might be avoided altogether. Similarly, Blustein refutes the view that the November 2010 decision on Irish banks was the result of a unilateral diktat of the ECB, and correctly emphasizes the role of then US Treasury Secretary Tim Geithner in rejecting a stance of “burning the bondholders” that might have created additional instability in European finance. On a broader level, Laid Low goes some way towards puncturing the fiscal-and-sovereign-debt-only narrative of the euro area crisis, most prominently in chapter 15, which aptly describes the bank-sovereign vicious circle and the inception of Europe’s banking union. From these chapters, the picture that emerges of the IMF is actually that of a strong institution, more able than most large organizations to learn from its mistakes, and generally effective in its engagement with Europe with a constant willingness to challenge the area’s occasionally incompetent leaders. While participating in the Troika, the IMF never compromised its decision-making independence as regards the use of its resources. It was not always right, as Blustein illustrates with the examples of Latvia in 2009 in chapter 4, or of Cyprus in 2013 in chapter 16. But it was often successful and almost always constructive.
To be sure, the IMF was constrained by European politics. But this was the flipside of the fact that in the euro area crisis, for the first time in more than three decades, the IMF has been intervening close to the core of the global financial system rather than in its less systemic periphery. An internal IMF document of January 2012, quoted by Blustein at the start of chapter 14, makes it refreshingly clear: “No economy—whether advanced, emerging or low income—is immune to an escalation of the [euro area] crisis. … Whereas country shocks in the 50 years prior could largely be considered idiosyncratic in that they did not destabilize the entire system, shocks in the advanced economy core … are now effectively systemic.” There can be little doubt that, should it be called to help with a crisis in China or the United States (God forbid), the IMF would not have a fully free hand either—even though China and the United States, unlike Europe, are not overrepresented on the IMF’s executive board. But the mere fact that the Fund intervened in “core” Europe demonstrates its relevance and its strength rather than any weakness. And the constraints on IMF staff and management decisions from the Fund’s shareholders are not a problem but rather the mark of a functioning governance framework. This framework can be improved—for example, by reducing Europe’s unjustifiable executive board overrepresentation as Blustein recommends—but the book does not make it appear fundamentally unsound.
This framing of the IMF’s role in the euro area crisis also provides greater clarity regarding its analytical blunders. If anything, Blustein is often too forgiving of these, perhaps inevitably given his reliance on interviews with current or former IMF staff. The main error on Greece was not to impose excessive austerity, or even to delay the inevitable restructuring. Miranda Xafa, a knowledgeable analyst and former IMF official, calculated that, had this happened in May 2010 instead of March 2012, the additional reduction in public debt would have been around 16 percent of GDP—a significant but hardly decisive difference. The IMF’s bigger mistake was an overestimation of Greece's institutional strength and capacity to reform, a so-called advanced economy, and, as a founding member of the Organization for Economic Cooperation and Development, presumed to be functionally governed. Similarly, the IMF erred in trusting the assessments of the local banks’ soundness by the Portuguese authorities, which it should have second-guessed instead. One lesson here is that the IMF’s traditional distinction between “emerging” and “advanced” economies is increasingly counterproductive, as other recent developments also illustrate. The IMF would be well-inspired to abandon this distinction altogether.
Overall, and despite the misleading nature of its title and of some of its framing, Laid Low is an important addition to the burgeoning literature on the euro area crisis. Its main contribution is to assemble essential factual material for further analysis, complementing other books such as Carlo Bastasin’s Saving Europe or Neil Irwin’s The Alchemists, as well as the in-depth study published last July by the IMF’s own Independent Evaluation Office (IEO). These and other forthcoming volumes will hopefully allow a gradual shift in the public’s understanding of the euro area crisis, from a cartoonish Hellenic-centered morality tale to a more complex but also more accurate story of financial fragility, multilevel governance, and multiple reverberations between banking, fiscal, and monetary imbalances.
Note: The author was a member of the IEO team that prepared the evaluation report mentioned in this post’s last paragraph. The content of this post is not based on the author’s work for the IEO, nor does it in any way represent a view of the IEO itself.