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Europe no image

Published on October 25th, 2012 | by Katharina Obermeier
Image © [caption id="" align="alignnone" width="566"] MF Managing Director Christine Lagarde © by International Monetary Fund[/caption]   It’s been a dramatic few weeks for the eurozone. First, German Chancellor Angela Merkel visited crisis-torn Greece, where she was promptly greeted by protesters burning Nazi flags. Next, European finance ministers imposed a ten-day deadline on the cash-strapped Greek government to carry out necessary reforms in order to receive their next loan instalment from the EU and IMF. And then on top of that, the EU was awarded the Nobel Peace Prize, which drew mixed reactions as it is an institution so deeply steeped in crisis. Yet, amidst all the commotion, the moment that was perhaps the most significant was when Christine Lagarde, Managing Director of the International Monetary Fund (IMF), publicly advised EU leaders to grant Greece more time to reduce its debt and meet its budget targets. It was a surprising statement when one considers the IMF’s history and the criticism it has faced in the past for imposing strict conditions on countries to which it was lending funds. In some cases conditions exacerbated existing problems and made it more difficult for national governments to pay back loans. The IMF’s policies and priorities have changed somewhat since that era, but it is still considered by many as the epitome of neoliberalism  in its insensitivity towards country-specific difficulties, demand-side economics and the morally problematic creditor-debtor relationship. Seen in this context, therefore, Lagarde’s statement was indeed an indication of a shift in paradigm for the institution. What rendered it even more significant, however, was the fact that the statement was made days after the EU finance ministers had set the Greek government their ten-day ultimatum for completing reforms tied to debt reduction. The IMF’s soft rhetoric on the situation in Greece stood in stark contrast to the EU’s hard-line approach, and raised a question that would have appeared ludicrous a few years ago but is now actually valid: Is the EU’s focus on austerity and rapid fiscal consolidation turning it into the new IMF? As pointed out in an earlier post on Catch21’s blog, in some ways, the EU has been forced to assume at least some of the responsibility which used to belong solely to the IMF. After all, if member states had not agreed to set up a bail-out fund (first the European Financial Stability Facility and then the European Stability Mechanism), it would have been up to the IMF to develop a loan programme for countries like Greece, when no other body would extend them credit. However, the way the situation has played out, means that despite the IMF’s involvement in the eurozone, the bulk of funding – and media attention – is focused on the EU. This puts the institution as a whole in the awkward position of the lender of last resort, obligated by economic and moral considerations to lend to those whom the markets no longer consider trustworthy. While the IMF was, in the past able to play the unpopular “bad cop” in this situation, the EU is finding this role difficult, as it rests on democratically elected elements such as the European Parliament and national governments, who have to convince their electorates that loans to troubled eurozone members are not “good money thrown after bad”. It is a delicate balance between ensuring that loans they have provided are not being mismanaged on the one hand, and not being viewed as a self-interested meddler in domestic politics on the other. EU leaders upset this balance when they used the very blunt tool of setting the Greek government a ten-day deadline, which served no constructive purpose except to temporarily reassure fiscally conservative electorates. The dramatic story ended in typical EU fashion, in the anti-climax of a European Commission statement, which said that productive discussions had taken place with Greek authorities and that the remaining issues would be addressed in further talks. While this specific situation has thereby been defused, European leaders would do well to remember the vitriolic reactions the IMF has evoked in the last few decades, and ask themselves whether this is indeed the type of institution they want the EU to become.

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Is the EU the new IMF?

MF Managing Director Christine Lagarde © by International Monetary Fund

 

It’s been a dramatic few weeks for the eurozone. First, German Chancellor Angela Merkel visited crisis-torn Greece, where she was promptly greeted by protesters burning Nazi flags. Next, European finance ministers imposed a ten-day deadline on the cash-strapped Greek government to carry out necessary reforms in order to receive their next loan instalment from the EU and IMF. And then on top of that, the EU was awarded the Nobel Peace Prize, which drew mixed reactions as it is an institution so deeply steeped in crisis.

Yet, amidst all the commotion, the moment that was perhaps the most significant was when Christine Lagarde, Managing Director of the International Monetary Fund (IMF), publicly advised EU leaders to grant Greece more time to reduce its debt and meet its budget targets. It was a surprising statement when one considers the IMF’s history and the criticism it has faced in the past for imposing strict conditions on countries to which it was lending funds. In some cases conditions exacerbated existing problems and made it more difficult for national governments to pay back loans. The IMF’s policies and priorities have changed somewhat since that era, but it is still considered by many as the epitome of neoliberalism  in its insensitivity towards country-specific difficulties, demand-side economics and the morally problematic creditor-debtor relationship. Seen in this context, therefore, Lagarde’s statement was indeed an indication of a shift in paradigm for the institution.

What rendered it even more significant, however, was the fact that the statement was made days after the EU finance ministers had set the Greek government their ten-day ultimatum for completing reforms tied to debt reduction. The IMF’s soft rhetoric on the situation in Greece stood in stark contrast to the EU’s hard-line approach, and raised a question that would have appeared ludicrous a few years ago but is now actually valid: Is the EU’s focus on austerity and rapid fiscal consolidation turning it into the new IMF?

As pointed out in an earlier post on Catch21’s blog, in some ways, the EU has been forced to assume at least some of the responsibility which used to belong solely to the IMF. After all, if member states had not agreed to set up a bail-out fund (first the European Financial Stability Facility and then the European Stability Mechanism), it would have been up to the IMF to develop a loan programme for countries like Greece, when no other body would extend them credit. However, the way the situation has played out, means that despite the IMF’s involvement in the eurozone, the bulk of funding – and media attention – is focused on the EU. This puts the institution as a whole in the awkward position of the lender of last resort, obligated by economic and moral considerations to lend to those whom the markets no longer consider trustworthy. While the IMF was, in the past able to play the unpopular “bad cop” in this situation, the EU is finding this role difficult, as it rests on democratically elected elements such as the European Parliament and national governments, who have to convince their electorates that loans to troubled eurozone members are not “good money thrown after bad”. It is a delicate balance between ensuring that loans they have provided are not being mismanaged on the one hand, and not being viewed as a self-interested meddler in domestic politics on the other.

EU leaders upset this balance when they used the very blunt tool of setting the Greek government a ten-day deadline, which served no constructive purpose except to temporarily reassure fiscally conservative electorates. The dramatic story ended in typical EU fashion, in the anti-climax of a European Commission statement, which said that productive discussions had taken place with Greek authorities and that the remaining issues would be addressed in further talks. While this specific situation has thereby been defused, European leaders would do well to remember the vitriolic reactions the IMF has evoked in the last few decades, and ask themselves whether this is indeed the type of institution they want the EU to become.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



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