The best explanation for the IMF’s decision to publish its report was floated by Mark Dow, a former IMF economist and now a private investor. He thinks the IMF is trying to change policy, using lessons about debt restructuring, productivity gains and austerity from existing bailouts to apply to the next bailout(wherever that may be).
Of the troika members, the IMF provides the least cash for the euro-area bailouts — about one-third of the funds for the Greek, Portuguese and Irish programs, and less for Cyprus. As a result, the IMF has taken a backseat in determining policy responses. Like any backseat driver, however, the IMF has methodically registered its concerns for the past year about front-loaded austerity and its negative effect on growth. The fund has been playing a long game here, chipping away at the euro area’s prevailing wisdom on fiscal adjustment and productivity gains, and waiting for the evidence to mount in favor of its position.
The Cyprus bailout is halfway between how the Greek bailout was set up and how the IMF would like to see things done in the future. There was private-sector participation upfront, with bank bail-ins reducing the size of the bailout. At the same time, it wasn’t enough. The IMF was essentially given the figure for the size of the bailout program and forced to reverse engineer a debt sustainability analysis that could justify that figure.
With the Cypriot bailout a done deal and euro-area markets relatively sanguine, this was the time for the IMF to try to take advantage of the slowly turning tide, pushing euro-area crisis-fighting policies toward upfront debt restructuring and away from front-loaded austerity.
The bigger question is whether the other troika members will take the IMF’s cue. There are signs that the European Commission accepts that front-loaded austerity has been self- defeating — it relaxed fiscal targets for six euro-area countries on May 29. Still, it looks as though the commission and ECB are unlikely to move much further. Both have responded to the IMF report by defending their roles in the Greek bailout program. The European Commission dismissed the claim that it failed to identify growth-enhancing reforms for Greece as “wrong and unfounded.” When asked whether the ECB thought it had made mistakes in the Greek bailout, President Mario Draghi said: “It’s very hard to pass ex-post judgement about things that happened four years ago.”
I doubt the IMF’s call to action for a substantially different policy approach in Europe will work. We won’t know for sure, though, until another euro-area country asks the troika for help.
Megan Greene is a Bloomberg View columnist and chief economist at Maverick Intelligence. She is also a senior fellow at the Atlantic Council in Washington.