The report said the whole approach to the eurozone was characterised by “groupthink”. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen. Before the launch of the euro, the IMF’s public statements tended to emphasize the advantages of the common currency. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.This pro-EMU bias continued to corrupt their thinking for years. “The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said. The IMF persistently played down the risks posed by ballooning current account deficits and the flood of capital pouring into the eurozone periphery, and neglected the danger of a sudden stop in capital flows.
"The possibility of a balance of payments crisis in a monetary union was thought to be all but non-existent,” it said. As late as mid-2007, the IMF still thought that “in view of Greece’s EMU membership, the availability of external financing is not a concern". At root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt crises. Now this is something that made me adamant we shouldn't join the euro, against the general tide of opinion, in the early years of the new millenium. Mind, I'd been reading David Smith, of course. And I wasn't the only one - Gordon Brown was also against it - one of the few things I agreed with him on. Though I always thought Brown was against the euro only because Blair was for it.
Returning to the IMF report, they note that states facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk. “In a monetary union, the basics of debt dynamics change as countries forgo monetary policy and exchange rate adjustment tools,” said the report. This would be amplified by a “vicious feedback between banks and sovereigns”, each taking the other down. That the IMF failed to anticipate any of this was a serious scientific and professional failure.
As the eurozone wasn't prepared and couldn't get an act together - which was the real root cause of the problems - I think the IMF is being a bit hard on itself here. It had to act and was in an invidious position when it was first drawn into the Greek crisis. The Lehman crisis was still fresh. “There were concerns that such a credit event could spread to other members of the euro area, and more widely to a fragile global economy,” said the report. The eurozone had no firewall against contagion, and its banks were tottering. The European Central Bank had not yet stepped up to the plate as lender of last resort. It was deemed too dangerous to push for a debt restructuring in Greece.
While the Fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability. A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced cut. Ex Greek Finance minister Yanis Varoufakis (you remember him - the dude who wore a long leather jacket and his shirt out of his trousers when he met Osborne at No 11 - real rebel, huh?) called it "fiscal water-boarding". Well he might have looked a prat, but it turns out he was right (very rare for an ultra leftie in my experience, but there you go).
The attempt to force through an "internal devaluation" of 20pc to 30pc by means of deflationary wage cuts was self-defeating since it necessarily shrank the economic base and sent the debt trajectory spiralling upwards. “A fundamental problem was the inconsistency between attempting to regain price competitiveness and simultaneously trying to reduce the debt to nominal GDP ratio”. The IMF thought the fiscal multiplier was 0.5 when it may in reality have been five times as high, given the fragility of the Greek system. The result is that nominal GDP ended 25pc lower than the IMF’s projections, and unemployment soared to 25pc instead of 15pc as expected. “The magnitude of Greece’s growth forecast errors looks extraordinary,” it said.
The injustice of all this is that the cost of the bail-outs was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report. “If preventing international contagion was an essential concern, the cost of its prevention should at have been borne – at least in part – by the international community as the prime beneficiary,” it said.
Never trust the Greeks, hey? Or the Germans either, methinks, as they seemed to drive the Greece agenda. And what about the Italians - I'm still waiting with some anxiety for that report on the banks..... (see post of 18 July)
A lot of this came from a good newsfeed on msn (see http://www.msn.com/en-gb/money/news/imf-admits-disastrous-love-affair-with-the-euro-apologises-for-the-immolation-of-greece/ar-BBv0jOf) but the gratuitous comments are all mine
Never trust the Greeks, hey? Or the Germans either, methinks, as they seemed to drive the Greece agenda. And what about the Italians - I'm still waiting with some anxiety for that report on the banks..... (see post of 18 July)
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