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All on Board: The EU, ECB and IMF go to Work in Athens

Actualité 04.03.2010

When Prime Minister, George Papandreou, announced after the special EU Council meeting in Brussels that the IMF is providing “technical expertise” to the Greek government some commentators inside and outside Greece seemed to be caught by surprise. They should not have been in such a state of mind. Speculation in the past few weeks, over when and how the IMF should be called in to assist Greece, has been excessive.

A vote of no confidence in the Barroso Commission

The IMF is already firmly anchored in Athens since mid-January 2010 when a delegation from Washington first arrived in Greece. The IMF assisted the government in drafting the budget deficit reduction program and provided technical advice on improving the controversial state of the Greek statistical services.


Dr. Jens Bastian, Senior Economic Research Fellow at ELIAMEP (Hellenic Foundation for Foreign and European Policy) in Athens, Greece


The fact that the IMF has now officially been invited on board together with the European Commission and the European Central Bank (ECB) to monitor the strict implementation of the stability and growth program of the Papandreou government is telling for a number of reasons.

Foremost, it is a vote of no confidence in the Barroso Commission in Brussels. The Council’s decision to enlarge the number of institutional monitors over Greece’s finances to include the IMF and the ECB implies that the Commission was not regarded as solely capable of getting the job done.

This triumvirate arrangement will require close cooperation and coordination between the Commission, the ECB and the IMF. The first test of its effectiveness arrives in mid-March when Athens has to deliver its progress report on fiscal consolidation. It will be interesting to observe if all three institutions share the same assessment about Greece’s budgetary progress.

 

The IMF of 2010 is not the fund it was ten years ago


The IMF of 2010 is no longer the same monetary fund as it was a decade ago during the Asian financial crisis in 1997 or the Russian rouble crisis in August 1998. During the global economic crisis in 2008 and 2009 the IMF came to the assistance of four EU Member States, namely Hungary, Latvia, Poland and Romania.

The reasons for the IMF intervention and the nature of the Fund’s assistance programmes vary considerably between these four EU Member States. What they have in common is a high degree of flexibility regarding programme implementation and, if necessary, adjustments can be made over time. Moreover, the IMF has actively sought the cooperation of the World Bank, the European Union and the European Bank for Reconstruction and Development in London when devising such coordinated programs and burden sharing.

Having the IMF and the ECB look over your shoulders is a complex enterprise that requires a carefully chosen narrative in Athens. Bringing both institutions on board to monitor programme implementation, to advise on budgetary matters and to support capacity building initiatives, provides Papandreou with additional political cover for his ambitious reform agenda.

It may be smart politics under conditions where contingency planning for various scenarios is necessary, including worst-case scenarios. Indeed, extending the IMF’s current technical expertise to include the request for financial assistance would constitute an unprecedented development. To date, the IMF has never provided such assistance to a Member State of the eurozone. Moreover, the eurozone is not a member of the IMF as only individual countries can be members.

 

The Greeks are testing multiple scenarios


Game planning for a variety of scenarios also includes considerations about the costs of loan facilities should the Greek authorities need them. It is not a given that any eurozone loan would be cheaper then a regular standby agreement with the IMF based on Greece’s drawing rights in Washington. If Athens were to need such external financial assistance during 2010 – and so far the Greek authorities emphasize that they don’t – it should take whichever loan is cheapest and where it can, exercise leverage on the strings attached to such funding.

The integration of the IMF and the ECB into the emerging monitoring architecture is a clever strategic move in case the fiscal situation should worsen in the coming months and Plan B or C has to be activated at short notice. It is better to already have a functioning chemistry established between the IMF, the ECB, the Commission and the government in Athens than to start making urgent contingency planning under severe time constraints.

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