Interesting set of articles in the Globalist this week on the ramifications of the Greek economic meltdown on and for Europe:
Research Center > Global Economy
The IMF, Greece and the End of Euro-Chauvinism
By Alfred Steinherr and Stephan Richter | Wednesday, March 31, 2010
In dealing with the Greek debt crisis, the worst outcome has been avoided. Bringing in the IMF is a positive development, but the intra-European decision-making process used to come up with a proper response is a clear sign of European dysfunction â but one which may ultimately hold the promise of a solid outcome.
A top French magazine editor recently intoned rather full-chestedly in the context of the debate over Greeceâs economic fortunes that âthe IMF is for Somalia, Mauritania, not for Europe. Itâs a question of pride, and of civilizations.â
Few remarks underscore more clearly the need for Europeans to get off their high horse â and to accept the arrival of true global conditionality.
Europeans need to get off their high horse â and accept the arrival of true global conditionality.
The days are long gone when intervention to correct profound economic and financial mismanagement was a one-directional missive imposed by the (global) North upon the (global) South as a sign of the compassionate grace of developed âcivilizations.â
If we are serious in talking about global economic integration, we better abandon any idea that the IMF is a one-directional instrument imposed upon under-developed countries as part of some ill-conceived notion of the Westâs âmission civilisatrice.â
Similarly, the European hesitation to embrace the IMF as a useful, and neutral, enforcer of discipline (if needed) and enhancer of credibility because âthe Americans dominate the IMFâ is quite outdated.
There indeed used to be a time when senior IMF officials with a U.S. passport were spewing out U.S. policy positions â and (ab)used the institution as an extension of the U.S. Treasury Department.
But at a time when the intellectual leadership of the Fund has been thoroughly refreshed (if not â considering the intellectually forceful personalities of its managing director and chief economist â positively âFrenchifiedâ), such worries border on conspiracy mania.
To make a long story of convoluted European thinking short, the involvement of the IMF in the Greek problems is a positive development. This is not just because the IMF has extensive experience in dealing with such situations, but also because any financial support provided to Greece by the Fund does not represent a breach of the Maastricht Treaty, an international treaty that is the basis for the euro.
At a time when the intellectual leadership of the IMF has been positively "Frenchified," European worries border on conspiracy mania.
On a purely technical level, but one that is critically important in this case, the Fund has both the experience and the capacity to establish credible public accounts after detailed research and credible forecasts. In contrast, Eurostat â the European Statistical Office â neither has the necessary manpower nor the authority to do that.
Eurostat, for its part, cannot interfere with the methods or data collection processes and treatments in member countries. It can only present data provided by national authorities. This is called âmutual respectâ â and may end up in data hocus-pocus, as it did in Greeceâs case.
Despite the laudable involvement of the IMF, there is no denying that the ultimate outcome is, at least in spirit, though not overtly, a negation of the Maastricht Treaty. It invites the market to continue mispricing government debt because it has become clear that, one way or another, there will be assistance.
In particular, bondholders have not been asked to pay part of the bill. Considering that this is quite different from similar instances of overborrowing involving Argentina, Russia or the Ukraine, that is perhaps an indication that true global conditionality still has further to go when it comes to European client states.
While the whole process leading up to the agreement was neither especially laudable for Europe as a whole or for Franceâs government, the same is true for the German government.
Admittedly, this was the first time any of them were caught up with an eventuality that had been dealt with in the Maastricht Treaty (the âno bail-out clauseâ) â but one that all governments hoped would never occur.
Bondholders have not been asked to pay part of the bill. That is perhaps an indication that true global conditionality still has further to go when it comes to European client states.
At the European level, the complexity was substantially increased by the fact that there were several sub-groups with conflicting interests at the negotiating table.
There were countries for which the no bail-out clause is an essential part of the functioning of the euro capital market â and countries which have a more flexible interpretation (primarily those faced with already high debt/GDP ratios and no visible efforts underway to lower them).
Another dividing line was formed by the countries whose banking sectors have high degrees of exposure to Greece (such as France, Germany, Italy and Luxembourg) and would thus be hurt by a Greek âbankruptcyâ â and those countries whose banks were not greatly exposed.
A further dividing line separated those countries that might become beneficiaries of a flexible interpretation of the no bail-out clause (think Italy, Portugal, Spain) from those countries that do not expect to become beneficiaries.
As to the German role, it mattered especially in this case not just because it has the continentâs largest economy, but also because the underlying Maastricht Treaty was largely shaped by Germany and signed rather hesitatingly by other EU members â a conflict which has now re-emerged.
Probably the biggest problem was the German position shifting â in an uncharacteristic, even un-German fashion â many a time during the negotiations. That created tremendous confusion â and provided no clear leadership.
Germany's Confused Path of EU Leadership
By Alfred Steinherr and Stephan Richter | Thursday, April 01, 2010
Europe has struggled to agree upon a continent-wide approach to Greece's fiscal crisis. The biggest problem in recent negotiations was Germany's frequent position shifting â in an uncharacteristic, even un-German, fashion. That created tremendous confusion â and provided no clear leadership.
lthough it was clear from the beginning that Germany, along with several other countries such as Austria, the Netherlands and Sweden, favored a no bail-out solution, Germany was initially against an IMF intervention.
It only seized upon that opportunity when the Greek government threatened to go to the IMF if European assistance was not approved in a timely fashion.
The question is not whether or how much Germany could pay. Nor is it whether German tax-payers would agree to tolerate payments for Greece.
Previously, Germany had toyed with the idea of establishing a European Monetary Fund â but only until it found out that this would take time and could not be of any real use to Greece. It also found out late that setting up an EMF would mean an end to the no bail-out clause and negate the traditional disciplinary forces of capital markets on borrowers.
None of that precisely adds up to a credible show of leadership â all the more so considering that the confusion reined just within Chancellor Merkel's own party, the CDU, so she could not even argue that it was a result of coalition politics.
As a result of these multiple failings on the pan-European, French and German levels, diplomatic skills, to put it mildly, were only parsimoniously used.
But in the end, the IMFâs involvement as a credible disciplining force is to be welcomed, not last from the perspective of German diplomacy. Demonstrations in Greece focused on Ms. Merkel â and some European media christened her, predictably enough, the âGerman Thatcherâ â or, more creatively, âMs. Bismarck.â
Ever since its experiences in Korea, the IMF is well-suited to take the heat of the streets â and serve as a useful lightning rod.
And while, in general, it makes perfect sense that Europe should be able to deal with a European problem such as Greece, the well-ingrained European way to deal with such problems has typically come in the form of a generous redistribution of funds â but without establishing a clear quid-pro-quo.
The real cost to be avoided is for Germany to be judged by the market as overextending itself and having too much debt â and too many soft assets (loans to Greece, for example).
As a result, the EU has not shown itself capable to deal with the two key issues when push really comes to shove: First, between lenders and borrowers, there can be no equality. And second, between respect of law and neglect of law, there can be no communality. Both of these points may be hard to swallow at first, but are inescapable in the ultimate analysis.
To make a long story short, the credibility of the euro is too important to be left to shady political compromises. For that reason, it is better to involve the IMF.
All those who believe that Germany should have been âmore generousâ or âmore flexibleâ ought to consider the following scenario: What would happen if Germany itself ran into confidence problems? If Germany were downgraded by rating agencies, something that may soon happen to the UK, the euro would no doubt suffer seriously.
That was why Germany needed to proceed cautiously. True, whether this is to its liking or not, the country continues to be the paymaster of Europe (providing up to one-third of the funds if Greece needs support).
For all the zeal to get the Germans to pay up whenever a country encounters problems, what is overlooked is the fact that, on a per capita income basis, Germany only ranks as a very middling country in Europe.
So while its coffers are indeed limited, it brings something vital to the table. Germany has the largest economy in the eurozone, a respect for legal obligations and relatively solid and trustworthy public finances. For that reason, it is the anchor of the euro system.
If Germany overburdened itself, that would immediately turn into the real risk for the euro. Whatever her shortcomings, and she would be the last to claim there are none, Chancellor Merkel is aware of that responsibility.
Germany is the anchor and benchmark to the European debt markets (and credibility), while the United States serves the identical function globally.
Her ultimate position, favoring an IMF involvement and not succumbing to playing the generous-friend game, is not the result of lack of sympathy â but the result of a keen sense of economic and political responsibility. It has, in the end, little to do with German polls or positioning her party for upcoming regional elections, as is often claimed.
The question is not whether or how much Germany could pay. Nor is it whether German tax-payers would agree to tolerate payments for Greece. The real cost to be avoided is for Germany to be judged by the market as overextending itself and having too much debt â and too many soft assets (loans to Greece, for example).
Credibility in the markets is a fragile asset. Just ask the U.S. Treasury and the Fed which, in view of depressingly large, long-term deficits, need to preserve the belief in the markets that the U.S. government is fundamentally sound.
In that sense, where Germany is the anchor and benchmark to the European debt markets (and credibility), the United States serves the identical function globally. Whatever their past merits, both countries have to carefully contend with lengthening odds as anchors.
As regards Greece, what it needs now most is reforms. Its planned savings in public finance are only one side of the adjustment coin. With reduced government deficits, there will not be enough demand to sustain the present level of economic activity. And the countryâs external competitiveness is weak.
Whatever their past merits, both countries have to carefully contend with lengthening odds as anchors.
For that reason, the engagement of the IMF is important beyond the short-term financing deal. The really big job is in transposing the vital elements of what used to be the Washington consensus to restructure and modernize the Greek economy.
In short, the IMF needs to act where Europe, with its past ways of resorting all too easily and uncritically to providing general (and generous) regional aid funds, has flunked as a serious economic manager.
Editor's Note: This article was written by Stephan Richter and Alfred Steinherr, President and Chief European Economist, respectively, of The Globalist Research Center.