A report on the IMF’s work in Europe exposes raw nerves over the handling of Greece

August 3, 2016

It remains difficult to have a calm discussion about Greece. Just look at the reaction to the release on July 28 of the Independent Evaluation Office of the IMF’s review of the handling of the European debt crisis. Ambrose Evans-Pritchard of the Daily Telegraph called the IEO's conclusions a “lacerating verdict” on the IMF’s management of the “most damaging episode in the history of the Bretton Woods institutions.” Ian Talley of the Wall Street Journal said the watchdog’s report “gives credence to some of the fund’s harshest critics.” The Financial Times called the assessment “damning.”

But just as reporters were quick to judge, some of those responsible for IMF policy during those years became defensive. Among the critiques in the hundreds of pages released by the Independent Evaluation Office (IEO) was the fund’s poor economic forecasting. “So what? We were in the middle of a hurricane,” said John Lipsky, the No. 2 at the IMF at the onset of the eurozone debt crisis, told the Australian. Managing Director Christine Lagarde also sought cover behind the “unprecedented” nature of the calamity. “Overall, the conclusion I draw is that fund’s involvement in the euro area crisis programs has been a qualified success,” she said in a statement on the IEO report.

Lagarde can say that because things went well in the other countries that sought her help. The IEO said the bailout of Ireland was “exemplary” and that the fund’s work in Portugal went mostly according to plan. Greece was another matter. The country was approved for a loan in the spring of 2010. Three years later, gross domestic product was only 77 percent of what it was in 2009; the unemployment rate had surged to 27.5 percent from 9.6 percent; and the debt-to-GDP ratio was rising, not shrinking as promised. The rescue of Greece can only be described as a qualified disaster.

That’s not all on the IMF. European authorities stubbornly refused to allow Greece to default on its debt and Greek politicians made matters worse by refusing to accept the mess they were in. Much of the coverage of the IEO review was harsher than the report itself. The troika of the European Commission, the European Central Bank, and the IMF had its issues, but overall it functioned efficiently, the watchdog said. The IEO also dismissed the notion that IMF was the “junior partner,” concluding the fund had a veto just like everyone else. A fair assessment of the IMF’s role in the eurozone crisis also should acknowledge that the fund already has owned up to many of its mistakes. It admitted that it underestimated the impact of austerity on economic growth and adjusted its approach to Greece accordingly. Lagarde eventually insisted on debt restructuring, overcoming objections in Europe. She probably should have done so much sooner. But that is an assessment based on hindsight. The IEO said opinion within the fund on what to do about Greece was split in 2009 and 2010. That forced the IMF’s leaders to make a call. “Sometimes you have to take risks to get things done,” Lipsky told the Australian. “If all you’re worried about is you’re going to be subject to ex-post criticism, that can be paralysing.”

Treating the IMF fairly doesn’t mean letting it off the hook. The IEO said the executive board had a “perfunctory” role in setting policy for Europe. When the decision was made to lend to Greece, the board received almost no notice that management intended to rewrite rules that kept the IMF from lending to countries that in would struggle to keep up with their debt payments. The fund’s leaders regularly went straight to European capitals and members of the G7 with issues related to the eurozone, bypassing the board. That likely created a situation of “information asymmetry,” as European and G7 board members would have had more intelligence than their counterparts from developing Asia, Africa, and Latin America, the IEO observed. There surely was resentment, as the legacy powers already were dragging their feet on allowing countries such as China and Brazil to have more say. “The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped to create the perception that the IMF treated Europe differently,” the report said.                                      

To be sure, the executive board had been guilty of weak oversight for years. It therefore is easy to understand the impulse to ignore it, especially in the heat of an international crisis. But as the IEO notes, an engaged board might have been able to help the IMF avoid some of its mistakes. For example, the staff hadn’t developed a policy for engaging with the eurozone, even though it started to worry about Ireland and Greece in 2009. A discussion with the board might have caused someone to notice such a rudimentary oversight. The decision to rewrite the IMF’s lending standards for Greece arguably was the right thing to do. As Lagarde argued, the fund bought the eurozone’s leaders time to put out the fire. But the secretive way in which it was done smacked of favouritism and back-room dealing. Republicans in Congress even used the maneuver as justification for their five-year hold on IMF governance reforms agreed in 2010. A debate at the executive board might have avoided reputational damage.

The self-appointed prosecutors in the international business press might also have been left with less material with which to make their cases.              

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About the Author

Kevin Carmichael is a senior fellow at CIGI and the national business columnist at the Financial Post.