Greek Bailout: IMF and Europeans Diverge on Lessons Learnt

On 20 August, the Greek government is scheduled to exit its IMF bailout programme, ending a series of three programmes that have run continuously since 2010. The Greek programme was the largest, most high-profile and most politically controversial in a series of post-global financial crisis bailouts of EU member states organized by the so-called ‘troika’ consisting of the European Commission, the European Central Bank and the IMF.

Politically, the course of action taken by the troika has been seen as controversial at best. The Greek economy has now suffered the longest recession of any advanced capitalist economy, overtaking the slump suffered by the US during the Great Depression in 1929. In the process, the Greek political system has been upended, social exclusion has increased, and hundreds of thousands of well-educated Greeks have left the country in search of opportunities elsewhere.  

While the stated aim of the troika – to restructure Greek debt and reform its fiscal policy in order to avoid a sovereign default – was shared by its members, as the scale of the crisis wore on, the priorities of each member began to diverge. Even as the final exit package was negotiated in May and June, the IMF advocated for more robust debt relief against the EU’s insistence on more limited relief, conditional on strict monitoring, even after the programme had ended. To some extent, this divergence has persisted beyond the Greek crisis itself.

While the IMF has by no means repudiated the ideas of the Washington Consensus, over the last few years, the Fund has given several indications that the Greek experience has been chastening. In 2015, the IMF began to advocate more lenient debt restructuring terms when negotiating the start of the third bailout package after the election of the Syriza government, against a harsher line taken by the European institutions. Later that same year, the Fund issued a report reviewing the programmes it had undertaken in the wake of the global financial crisis, and among its conclusions was concern that pushing fiscal consolidation too quickly led to an increased debt burden by stifling economic activity. The next year, the IMF published an article arguing that neoliberalism did not promote growth as much as expected and increased inequality. It is too soon to tell whether the IMF will incorporate these lessons into its future programmes, but this level of public self-criticism is remarkable.  

The European institutions, on the other hand, have continued to maintain a consistent hard line on debt repayment – both with Greece and beyond. The eurozone first made the promise to write off part of the Greek debt in November 2012, provided Greece achieved significant budgetary surpluses over the following years. While Greece indeed managed to do so in 2013 and 2014 – at significant cost to its economy – Europeans avoided the topic while Greece almost went off the rails with the Tsipras-Varoufakis episode, polarizing renegotiation in the first half of 2015. It was only in June 2017 when the eurozone agreed, within the framework of Greece’s impending bailout programme exit, a deferral of debt repayments and an extension of average maturities for 10 years. This, however, has little immediate impact on the Greek economy as even this limited concession is tied to an obligation on Greece to achieve important budget surpluses of over 2 per cent by 2060.

Outside of Greece, EU intransigence on banking policy has prevented the Italian government from intervening to address the high percentage of non-performing loans on its banks’ balance sheets and on fiscal rules which prevented the previous Italian administration from pursuing greater investment and pro-growth policies. This conflict is only likely to be exacerbated under Italy’s new populist government.

So why have these institutions taken such different lessons from this crisis? The answer may have to do with their divergent mandates. The IMF maintains a role as a ‘lender of last resort’, and so there is a significant stigma attached to countries approaching it for assistance. The Greek bailout programme, which followed controversial IMF loan programmes after the Asian financial crisis in 1997–98 and economic turmoil in Argentina in 2002–03, was a high-profile example of the IMF not returning a country to solvency and better economic governance, but being involved in a controversial programme of lowering living standards. For countries to be willing to overcome the stigma of going to the IMF, they must have confidence in there being light at the end of the tunnel. If the IMF is unable to credibly provide this, it becomes a problem for the IMF’s role in global economic governance.  

The priorities for the European institutions are more about maintaining cohesion and upholding the rules of the EU. Contrary to the IMF, for Europeans the management of the eurozone crisis has always entailed political considerations that are as important as, if not more important than, economic ones. In the specific case of Greece, this has meant that creditor governments must be able to legitimize in the eyes of their electorates the provision of massive sums of money for bailing out a country historically seen as profligate and desperately difficult to reform. In light of this, being able to present Greece as firmly on a path of fiscal prudence – whereby it will not only not request another bailout but will actually start repaying its debt – is the most important consideration for other eurozone governments.

This predicament brings the restructuring of Greek debt in 2011 under a new light: at the time it was presented to the Greek people as the opportunity to rid the country of a significant part of its debt burden while transferring the rest to Greece’s eurozone partners. The idea was that Greece would be more sheltered if its debt were held by political actors instead of faceless and non-accountable financial market actors.

The irony, seven years later, is that these same political partners are proving extremely rigid in the face of requests for further alleviation of Greece’s debt burden, precisely because their governments function under the asphyxiating scrutiny of their electorates. Where once politics was seen as a helpful substitute for global market forces, it now stands in the way of Greek recovery.