Blog Post

Troika conflict shows need for substantial reform

The recent controversy between the IMF and the European Commission on the question of when a debt restructuring should have been done raises the broader question about the future collaboration between the IMF and the European institutions in the euro area. 

By: Date: June 11, 2013 Topic: Macroeconomic policy

The recent controversy between the IMF and the European Commission on the question of when a debt restructuring should have been done raises the broader question about the future collaboration between the IMF and the European institutions in the euro area. The IMF has just issued a paper arguing that in Greece, the debt restructuring should have happened  earlier. The European Commission responded on June 6 with a different assessment contradicting the IMF.  While I tend to side with the IMF on the matter, the controversy raises the question why such different assessments are reached and what it means for further collaboration.

So why do the different institutions come to such a different assessment? After all, they both have excellent economists that are using the same data and base their assessment on similar technical methods. The difference is due to the different institutional and political objectives. The IMF has been increasingly critical due to its large exposure to the euro area. 56% of IMF lending now goes to the euro area. While IMF lending enjoys seniority status, important IMF shareholders in particular from emerging economies have become increasingly concerned about the supposedly different treatment of Europe compared to the previous crises in Asia and Latin America. And indeed, the IMF had to adapt its own working rules in order to provide loans to Greece, where already on it had put debt sustainability in serious doubt.

The European institutions instead follow different rules and a different logic. Being responsible for an incomplete and still fragile monetary union, they tended to be more risk averse. They were ready to do so despite the doubtful debt sustainability. Yet, at the same time, major European creditor countries were not ready to agree on an outright transfer or official sector involvement. The result was a fragile approach that was based on overly optimistic assumptions. These overly optimistic assumptions proved completely wrong. The Troika had predicted a small recession in Greece with GDP falling during 2010-13 by only 3.5%. Instead, the actual contraction amounted to 21%. True, some of the reasons for the collapse of GDP could not be predicted. Who would have thought that the entire euro area would be in crisis and that an exit of Greece from the euro was a seriously debated option. Yet other factors were clearly too optimistically assessed. For example, it was hoped that Greece would quickly be able to adjust its production structure and be able to export much more so as to compensate for the drop in domestic demand. Projected privatization receipts were increased to unrealistic numbers when the programme derailed.

How should the Troika evolve to prevent similar failures from happening? In a recent report, we have argued that the IMF should be less financially involved. As a catalytic lender, it would provide only 10% of the overall financing of the programme. This would allow it to fully adhere to its own standards and in case of disagreement drop out of the Troika programme. At the same time, a decision by the IMF not to participate in the programme would provide a strong signal that indeed the foundations of the programme may be less robust than desirable.

On the European side, a programme may still be considered desirable, also from the point of view of financial, political and social stability. To render a programme more easily feasible and more operational, we would consider it useful that the ESM gradually evolves towards a European Monetary Fund with a clearly defined mandate and lower voting thresholds. The European Commission would thereby be relieved of its currently difficult dual role of being a community institution responsible for the treaty while at the same time implementing tough programmes as an agent of the Eurogroup. Finally, the ECB should remain part of the Troika but play a less decisive role in the day to day negotiations. Such a reformed Troika would be better for Europe and also for the IMF.

This comment draws on a joint report with Jean Pisani-Ferry and André Sapir.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts