Must-Read: Barry Eichengreen: Airing the IMF’s Dirty Laundry

Must-Read: Barry Eichengreen: Airing the IMF’s Dirty Laundry:

The IMF established an Independent Evaluation Office (IEO) to undertake arm’s-length assessments of its policies and programs…

Self-serving claims were in the interest of European officials, but why was the IMF prepared to accept them? One answer is that European governments are large shareholders in the Fund. Another is that the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture. The report… criticize[s] the Fund for acquiescing to European resistance to debt restructuring by Greece in 2010. It criticizes the IMF for setting ambitious targets for fiscal consolidation… but underestimating austerity’s damaging economic effects…. The report rejects claims that the IMF was effectively a junior member of the Troika, insisting that all decisions were made by consensus. But that is difficult to square with everything we know about the fateful decision not to restructure Greece’s debt. IMF staff favored restructuring, but the European Commission and the ECB, which put up two-thirds of the money, ultimately had their way. He who has the largest wallet speaks with the loudest voice. In other words, there are different roads to “consensus.” The Fund encountered the same problem in 2008, when it insisted on currency devaluation as part of an IMF-EU program for Latvia….

The implication is that the IMF should not participate in a program to which it contributes only a minority share of the finance. But expecting the IMF to provide majority funding implies the need to expand its financial resources…. And was the ECB even on the right side of the table in these European debt discussions? When negotiating with a country, the IMF ordinarily demands conditions of its government and central bank. In its programs with Greece, Ireland, and Portugal, however, the IMF and the central bank demanded conditions of the government. This struck more than a few people as bizarre.
It would have been better if, in 2010, the IMF had demanded of the ECB a pledge “to do whatever it takes” and a program of “outright monetary transactions,” like those ECB President Mario Draghi eventually offered two years later…. Nothing prevents the IMF from demanding policy commitments from regional bodies when lending to their member governments…