- International Monetary Fund. Independent Evaluation Office;International Monetary Fund. External Relations Dept.
- Published Date:
- September 2016
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International Monetary Fund (IMF), 2008, “Greece: 2007 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Greece,” IMF Country Report No. 08/148 (Washington).
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International Monetary Fund (IMF), 2011b, Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks,September (Washington).
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International Monetary Fund (IMF), 2011d, “Greece: Fifth Review under the Stand-By Arrangement, Rephasing and Request for Waivers of Nonobservance of Performance Criteria; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece,” IMF Country Report No. 11/351 (Washington).
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International Monetary Fund (IMF), 2012b, “The Acting Chair’s Summing Up—Review of Conditionality, Executive Board Meeting 12/84,” September5 (Washington).
International Monetary Fund (IMF), 2012c, “IMF Executive Board Concludes Discussion of 2011 Review of Conditionality,” Public Information Notice No. 12/109, September17 (Washington).
International Monetary Fund (IMF), 2013a, “Stocktaking the Fund’s Engagement with Regional Financing Arrangements,” April (Washington).
International Monetary Fund (IMF), 2013b, “Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework,” April (Washington).
International Monetary Fund (IMF), 2013c, “Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement,” IMF Country Report No. 13/156 (Washington).
International Monetary Fund (IMF), 2013d, “Staff Guidance Note for Public Debt Sustainability in Market Access Countries,” May (Washington).
International Monetary Fund (IMF), 2014a, “Revised Operational Guidance to IMF Staff on the 2002 Conditionality Guidelines,” July (Washington).
International Monetary Fund (IMF), 2014b, “IMF Executive Board Discusses the Fund’s Lending Framework and Sovereign Debt,” Press Release No. 14/294, June20 (Washington).
International Monetary Fund (IMF), 2014c, “The Chairman’s Summing Up: IMF Response to the Financial and Economic Crisis—An IEO Assessment,” October28 (Washington).
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2015, “Someone Needed to Speak Truth to Europe,” Financial Times,July7.,
2015, “Taking Stock of Structural Reforms: A Firm-Level Perspective,” in “Portugal: Selected Issues,” IMF Country Report No. 15/127 (Washington: International Monetary Fund).,
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2011, “Fund Must Turn Away from DSK’s Economic Mistakes,” Financial Times,May18.
2012, “The European Sovereign Debt Crisis,” Journal of Economic Perspectives, Vol. 26, pp. 49−68.
2007, “Europe and Global Imbalances,” Economic Policy,July, pp. 520−73.
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Statement by the Managing Director Chairman’s Summing Up
Statement by the Managing Director on the Independent Evaluation Office’s Report on the IMF and the Crises in Greece, Ireland, and Portugal: An Evaluation by the Independent Evaluation Office
Executive Board Meeting
July 19, 2016
I welcome the report of the Independent Evaluation Office (IEO) on the Euro Area crisis programs. Their work provides an independent and in-depth account, which I have no doubt will make an important contribution to understanding the Fund’s approach to the crisis. As I have emphasized repeatedly, the IEO plays a vital role in enhancing the learning culture within the Fund, strengthening the Fund’s external credibility, and supporting the Executive Board’s institutional governance and oversight responsibilities.
Overall, the conclusion I draw is that the Fund’s involvement in the Euro Area crisis programs has been a qualified success. The crisis in the Euro Area was unprecedented. Coming against the backdrop of the global financial crisis, the risks of broader contagion were high. Key challenges included the abrupt loss of market access; the need for orderly adjustments in countries with deep imbalances and no recourse to exchange rate policies; and the absence of Euro Area firewalls. In the face of this unprecedented systemic challenge, Fund-supported programs succeeded in buying time to build firewalls, preventing the crisis from spreading, and restoring growth and market access in three out of four cases (Ireland, Portugal, Cyprus). Greece, however, was unique: while initial economic targets proved overly ambitious, the program was beset by recurrent political crises, pushback from vested interests, and severe implementation problems that led to a much deeper-than-expected output contraction. On the other hand, Greece undertook enormous adjustment with unprecedented assistance from its international partners. This enabled Greece to remain a member of the Euro Area—a key goal for Greece and the Euro Area members.
The IEO’s report offers many useful suggestions for the way forward. The Fund has also continually evaluated its own performance during the course of the 2010/11 programs and has taken action to incorporate lessons learned. That work will continue, and will benefit from the IEO’s evaluation.
I. Perspective on the Unprecedented Euro Area Crisis
With the passage of time, it may be too easy to forget what the world looked like in 2010, especially the uncertainty, market volatility, and fear of yet another Lehman-like systemic shock. Integrated financial markets and the lack of a Euro Area-wide crisis management framework and firewall meant that problems in countries in crisis could have spilled over to other vulnerable Euro Area members, posing potentially severe systemic risks. There was a need to build firewalls in a short time, amid great uncertainty and within the Euro Area’s consensus-based governance framework which required political agreement among 17 sovereign nations. Designing the adjustment programs was challenging as these Euro Area members faced abrupt loss of market access and deep imbalances—including structurally rooted competitiveness problems in some cases—without recourse to exchange rate flexibility.
Viewed in this context, the Fund-supported programs in the Euro Area were a success, albeit a qualified one. First and foremost, they succeeded in stemming systemic risks by, among other things, buying time to mobilize political support among Euro Area members to build firewalls and a crisis management framework. With the world economy fragile in the wake of the global crisis and financial markets still reeling from the collapse of Lehman only 18 months earlier, systemic concerns inevitably were paramount—and major contagion was avoided. Moreover, three of four programs—in Ireland, Portugal, and Cyprus—were successful in helping restore growth and market access. Still, recessions in some of these cases were deeper and longer than expected. Fiscal multipliers were initially underestimated (though later adjusted) and, importantly, both the global and European recoveries were weaker than expected.
Greece, however, posed additional and unique challenges. With unparalleled international support, Greece undertook major fiscal adjustment. But Greece was afflicted to a much greater degree than other countries by pushback from vested interests, severe implementation problems, and recurrent political crises. The attendant deep confidence crises—and repeated episodes of fears about Grexit—led to a much deeper-than-expected output contraction. Of course, none of these impediments was foreseen in advance and, with the benefit of hindsight, the initial assumptions about program ownership and growth proved much too optimistic. However, Greece remained a member of the Euro Area—a key objective for both Greece and other Euro Area members.
The IEO’s reports echo many of the lessons that we have drawn from our own internal assessments. We undertook rigorous self-assessment in the course of the 2010/11 programs and, as a result, have already made changes to aspects of the Fund’s operational and policy work. Early lessons were adopted in the context of the programs’ quarterly reviews: for example, fiscal multipliers were adjusted; and greater realism was applied to the likely pace of structural reforms. The Fund’s frameworks for debt sustainability analyses and dealing with debt overhangs were strengthened—including reform of the exceptional access policy and elimination of the systemic exemption. Under its program, Greece benefitted from substantial haircuts on private sector claims in 2012, as well as refinancing on highly concessional terms from its official creditors, and the IMF is currently calling for further official debt relief. Given the “troika” experience, work is underway to improve the effectiveness of the Fund’s collaboration with regional financing arrangements. Regarding surveillance, we have undertaken major initiatives to reflect the more globalized and interconnected world. These initiatives include revamping the legal framework for surveillance through a new Integrated Surveillance Decision, deepening analysis of risks and spillovers, strengthening macro-financial and financial sector surveillance (including of systemic risk), and upgrading the assessment of external positions.
In summary, the crisis in the Euro Area was extraordinary. It posed unprecedented challenges that, with the global financial crisis providing tinder, could have rapidly spread through Europe and beyond. The Fund, in conjunction with our membership, our partners in Europe, and the wider global community, took steps that averted what could have been a much more severe European and even global crisis. As we reflect upon this extraordinary time and upon our work to restore stability and quell a potentially larger crisis, we will continue to strive to do even better and to further refine our responses as we evolve as an institution. We must constantly aspire to do better in avoiding crises, managing crises, and learning from the past. And, I assure you, we will continue to be a learning institution in our endeavor to foster global monetary cooperation, secure financial stability, and promote sustainable economic growth with high employment and shared prosperity around the world.
II. Response to IEO Recommendations
The IEO makes five recommendations in this report. Below is my proposed response to each of these.
Recommendation 1. The Executive Board and management should develop procedures to minimize the room for political intervention in the IMF’s technical analysis.
I support the principle that the IMF’s technical analysis should remain independent. However, I do not accept the premise of the recommendation, which the IEO failed to establish in its report, and thus do not see the need to develop new procedures.
Recommendation 2. The Executive Board and management should strengthen the existing processes to ensure that agreed policies are followed and that they are not changed without careful deliberation.
I broadly support this recommendation. I concur that policy changes should be based on careful consideration by the Board. This, indeed, is standard practice. Even though all rules were followed, the process surrounding the creation of the systemic exemption took place under extraordinary circumstances, and I am committed to handling such circumstances better in the event of a future emergency situation of the kind the Fund faced in May 2010. The IEO also suggests that the Board independently “reviews the experience with the implementation of the exceptional access policy during the Euro Area crisis.” This kind of review is already being undertaken in the context of the Ex-Post Evaluations of Exceptional Access Arrangements for the crisis countries, including the one currently underway for Portugal, and thus an additional process is not warranted. Finally, I of course support the principle that we follow existing policies. However, I consider that existing checks and balances are adequate and commit to ensuring that they are diligently applied.
|(i)||The Executive Board and management shoud develop procedures to minimizie the room for political intervention in the IMF’s technical analysis||Qualified Support|
|(ii)||The Executive Board and management shoud strengthen the existing processes to ensure that agreed policies are followed and that they are not changed without careful deliberation||Support|
|(iii)||The IMF should clarify how guidelines on program design apply to currency union members||Support|
|(iv)||The IMF should establish a policy on cooperation with regional financing arrangements||Support|
|(v)||The Executive Board and management shoud reaffirm their commitment to accountability and transparency and the role of independent evaluation in fostereing good governance.||Support|
Recommendation 3. The IMF should clarify how guidelines on program design apply to currency union members.
I support this recommendation. It would help to establish agreed “rules of the road” with our membership and demonstrate evenhandedness across currency unions, while recognizing the considerable heterogeneity among them (as articulated in the corresponding IEO background paper).
Recommendation 4. The IMF should establish a policy on cooperation with regional financing arrangements.
I support this recommendation. Moreover, I am pleased to note that a paper on regional financing arrangement (RFA) cooperation is already in the Executive Board’s work program (available at: http://www.imf.org/external/pp/longres.aspx?id=5045, see paragraph 16).
Recommendation 5. The Executive Board and management should reaffirm their commitment to accountability and transparency and the role of independent evaluation in fostering good governance.
I support this recommendation. Indeed, I would like to emphasize that management and staff have been and will continue to be committed to accountability, transparency, and the role of the IEO. I also appreciate the specific suggestions under this recommendation to further strengthen cooperation with the IEO, which will be considered as part of the Management Implementation Plan.
The Chairman’s Summing Up The IMF and the Crises in Greece, Ireland, and Portugal—An Evaluation by the Independent Evaluation Office
Executive Board Meeting
July 19, 2016
Executive Directors welcomed the report by the Independent Evaluation Office (IEO) on the IMF and the Crises in Greece, Ireland, and Portugal, and appreciated the accompanying statement by the Managing Director. They agreed that the report’s findings provide valuable insights and lessons for handling crises in members of currency unions. Directors underscored that the work of the IEO continues to play a vital role in enhancing the learning culture within the Fund, strengthening the Fund’s external credibility, and supporting the Executive Board’s oversight responsibilities. Directors broadly shared the general thrust of the IEO’s main findings and broadly endorsed its recommendations, with some caveats.
Directors recognized that, while the Fund needs to learn from the experience of the three euro area crisis programs, it is important to acknowledge the difficult and unprecedented circumstances prevailing at the time. Key challenges included the abrupt loss of market access, the need to address deep imbalances without recourse to adjustment in the nominal exchange rate, and the absence of euro area firewalls. Directors also noted that the uncertainty and fear of contagion were acute given the backdrop of the global financial crisis. They emphasized that the Fund’s performance in these crisis cases must be assessed in this broader context as it navigated uncharted territory.
Against this background, Directors considered that the Fund-supported programs had succeeded in buying time to build European firewalls, preventing the crisis from spreading, and restoring growth and market access in Ireland and Portugal. They observed that the political economy of the Greek crisis was unique and complex. Directors generally viewed the unprecedented Troika arrangement as efficient overall, noting in particular how the Fund’s engagement had evolved over time. Nevertheless, the need to coordinate and reach common ground with the European partners might have affected the Fund’s agility as a crisis manager, and gave rise to criticism that its decision-making process lacked transparency.
Directors broadly agreed with the principle underlying Recommendation 1—that the IMF’s technical analysis should remain independent. They noted that procedures currently in place have been strengthened substantially in recent years in the direction recommended by the IEO. That notwithstanding, they recognized that there remains scope for further improving the analytical underpinnings of both surveillance and program design, especially in the areas of economic forecasts, external sector assessment, and integrated surveillance. Some Directors saw merit in developing procedures to ensure the independence of the Fund staff’s technical analysis in the face of any potential political interference. Many Directors noted that political-economy considerations, as with any legitimate differences of views, could offer relevant perspectives and help serve to ensure the program’s feasibility and success. Given the fiduciary duty of the Executive Board, Directors emphasized the importance of preserving its ability to make informed decisions, based on the available policy options and in a transparent manner.
Directors supported the principle underlying Recommendation 2—that existing policies should be followed and that they should not be changed without careful deliberation by the Board. Directors noted that the systemic exemption to the exceptional access criteria, which had been introduced under extraordinary circumstances, should have been considered more carefully and transparently by the Board. They appreciated the Managing Director’s commitment to handle similar circumstances better in the future and follow existing policies diligently. Most Directors considered that checks and balances are adequately in place, while a number of Directors saw scope for further strengthening existing procedures to enhance transparency and information symmetry within the Board.
Directors supported Recommendation 3—that the Fund should clarify how guidelines on program design apply to currency union members. They emphasized that, while such guidelines would help ensure evenhandedness across the membership, it will be important to take due account of heterogeneity across different currency unions. A number of Directors also saw merit in the IEO’s suggestion that the circumstances and modalities for setting conditionality on union-level institutions should be clarified. A number of other Directors took the view that union-level policy recommendations should be made in the context of surveillance discussions with currency union institutions. A number of Directors stressed that evenhanded surveillance across the membership would help dispel the perception that euro area countries, and advanced economies more broadly, are treated differently by the Fund.
Directors supported Recommendation 4—that the Fund should establish a policy on cooperation with regional financing arrangements (RFAs). In doing so, they emphasized the need to maintain flexibility, given the different mandates, policies, and institutional arrangements of RFAs. They looked forward to discussing the forthcoming paper on RFA cooperation, as part of the ongoing work to strengthen the global financial safety net.
Directors supported Recommendation 5—that the Executive Board and Management should reaffirm their commitment to accountability and transparency, as well as the role of independent evaluation in fostering good governance. Directors underscored their strong support for the independent evaluation and the IEO’s critical role in the Fund. They noted with concern the difficulty that the IEO had experienced in obtaining confidential documents that it deemed necessary for conducting the evaluation in a timely manner. They therefore appreciated the IEO’s specific suggestions under this recommendation to further strengthen Fund cooperation with the IEO, including with regard to the modality of interactions between the IEO and Fund staff and the IEO’s access to information. Directors welcomed the Managing Director’s strong commitment to ensure smooth collaboration between the IEO and the Fund, and to consider the IEO’s specific suggestions as part of the Management Implementation Plan, especially the Managing Director’s proposal to develop an IEO/Fund staff protocol. They also underlined the importance of timely preparation of Ex-Post Evaluations for all exceptional access arrangements.
In line with established practices, management and staff will give careful consideration to today’s discussion in formulating the implementation plan, including approaches to monitor progress.
The IEO is currently working with staff to develop a clear protocol for future evaluations.
Stand-By Arrangements are designed to help countries address short-term balance of payments problems, while the Extended Fund Facility helps countries address medium and longer-term balance of payments problems reflecting extensive distortions that require fundamental economic reforms. See www.imf.org/external/np/exr/facts/eff.htm.
The largest nonprecautionary IMF arrangement remains the 2002 SBA for Brazil (SDR 27.4 billion, including SDR 7.6 billion from the Supplemental Reserve Facility) while the largest in relation to quota was previously the 1997 SBA for Korea (1,938 percent).
Even so, the IMF financing amounted to at most half of that provided by euro area governments and institutions.
Blanchard then added a fourth, nontechnical, criticism: “creditors have learned nothing and keep repeating the same mistakes.” At the risk of oversimplification, Blanchard’s rebuttal of the three technical criticisms can be summarized as follows: (i) large fiscal adjustment was inevitable, given the lack of market access and a limit to the amount of official financing; (ii) the bailout benefited not only foreign banks but also domestic depositors and households; and (iii) most structural reforms were not implemented and “fiscal consolidation explains only a fraction of the output decline.”
Many of these criticisms were raised as part of a larger debate on austerity in the euro area (e.g., Lachman, 2011; Summers, 2012; Wolf, 2013) and, reflecting the strong ownership of these programs by the national authorities, were targeted more at the governments (or the policy itself) than at the IMF (e.g., Wise, 2013, 2014).
The relevant passage states: “In conducting its work, the IEO should avoid interfering with operational activities, including current programs.”
The Executive Board had offered a different interpretation of the word “interfering” in the IEO terms of reference in 2002 when it strongly supported the IEO’s evaluation of an SBA for Brazil, which was ongoing at the time.
Staff documents on informal Board meetings were provided to the IEO after the Evaluation Committee of the Executive Board clarified the terms under which the IEO could access such documents in April 2016.
In addition, to enhance the evaluation with external perspectives, the IEO asked distinguished scholars to provide inputs from their regional perspectives.
The original members were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
The SGP framework was amended in 2005 to give more emphasis to cyclically adjusted deficits. This followed the Council’s decision in November 2003 to suspend the EDP for France and Germany (Buti and Carnot, 2012).
Three reasons have been offered to explain the convergence of bond yields. First, financial markets treated all sovereign debt as risk-free, encouraged in this belief by regulatory and collateral rules (Buti and Carnot, 2012). Second, despite the no-bailout clause, the markets expected “some sort of rescue for individual sovereigns in trouble” (Obstfeld, 2013). Third, euro participation was considered to be permanent. This perception changed in 2010–12 with the possibility of “Grexit”—Greece’s exit from the euro—which introduced “redenomination risk.”
Regardless of the state of public finances, no country that had a current account surplus experienced a crisis. See Gros (2015).
As a result, the size of official financing to these countries was mainly determined by budgetary, not balance of payments, financing needs (Pisani-Ferry, Sapir, and Wolff, 2013).
Some even trace the start of the euro area crisis to the end of July 2007, when the German authorities bailed out IKB, a specialist lender based in Dusseldorf. This served as a signal that failing banks in the euro area would be rescued. “Germany Rescues Subprime Lender,” Financial Times, August 2, 2007.
The authorities were not receptive. Informal discussions on a program with Ireland started only in late September 2010.
In 2010, the IMF found Greece in breach of members’ reporting obligations under Article VIII, Section 5, of the Articles of Agreement (IMF, 2010e).
Greece’s rating was eventually downgraded to speculative-grade status in late April 2010. The ECB relaxed its collateral rules in several steps to keep Greek government debt eligible for refinancing operations.
Statement by the Heads of State or Government of the Euro Area, March 25, 2010.
Statement on the Support by Euro Area Member States, Brussels, April 11, 2010.
From the mid-1990s, Ireland had been among the fastest growing advanced countries. The country saw an unprecedented boom in living standards and attained full employment, while its budget position remained generally in surplus with a low debt-to-GDP ratio of about 25 percent. These “Celtic Tiger” years ended abruptly with the global financial crisis.
The sovereign spread of Portuguese 10-year bonds over German counterparts averaged about 20 basis points between 2000 and 2007. See Eichenbaum, Rebelo, and de Resende (2016).
Not only did the government ease fiscal policy, but it also reclassified some state-owned enterprises and public-private partnerships as part of the general government in keeping with an agreement reached with the European authorities. These liabilities, amounting to about 10 percent of GDP in 2011, required additional financing by the government.
According to the data available at the time, Portugal’s government debt was 90.6 percent of GDP in April 2011. The revised data show that the actual amount was 111 percent of GDP. See Eichenbaum, Rebelo, and de Resende (2016).
Statement by the Heads of State or Government of the Euro Area and EU Institutions, Council of the European Union, Brussels, July 21, 2011.
Communiqué, G20 Leaders’ Summit, Cannes, November 3–4, 2011.
“Spain—Terms of Reference for Fund Staff Monitoring in the Context of European Financial Assistance for Bank Recapitalization,” July 20, 2012.
The IMF’s public statements, except in one instance, did not use the term “enhanced surveillance,” which is a procedure developed in 1985 whereby the IMF provides monitoring of a quantified economic program “generally formulated with the assistance of the staff” (IMF, 1993). Enhanced surveillance is a service provided at the request of a member under Article V, Section 2(b) of the IMF Articles of Agreement (IMF, 1994b).
A large Greek debt service payment was coming due later in May 2010.
The Vienna Initiative, officially launched in January 2009, was designed, inter alia, to prevent massive capital withdrawals from emerging Europe by securing commitments from international banks to maintain their exposure.
Janssen (2010) correctly predicted that “three years from now, Greece will be facing an even higher debt burden” and that “jobs and economic growth will have been sacrificed.”
The news of having been invited by the euro area to participate in a financing package for Greece was received with much excitement by many at the IMF, according to IEO interviews
In Ireland, IMF staff pushed for bailing in senior unsecured creditors of Irish banks as part of the 2010 EFF-supported program but did not receive the support of global policymakers. The Fund nonetheless provided exceptional access financing to Ireland. See Chapter 4, Section B.
The design of the framework drew on the Prague Framework for Private Sector Involvement (PSI), which was endorsed by the International Monetary and Financial Committee (IMFC) at the Annual Meetings in Prague in 2000. The 2000 IMFC communiqué read in part: “In yet other cases, the early restoration of full market access on terms consistent with medium-term external sustainability may be judged to be unrealistic, and a broader spectrum of actions by private creditors, including comprehensive debt restructuring, may be warranted to provide for an adequately financed program and a viable medium-term payments profile. This includes the possibility that, in certain extreme cases, a temporary payments suspension or standstill may be unavoidable.”
This decision was purely an internal IMF matter and was not taken at the behest of euro area partners.
As Schadler (2016) notes, when the exceptional access framework was developed, the Executive Board considered adding a special provision relating to contagion or systemic effects. It was determined then that such a provision “could create a bias toward higher access for larger members, which could not be reconciled with the principle of uniformity of treatment” (IMF, 2003b; see also De Las Casas, 2016).
The initial note that was circulated to the Board on April 15, 2010 included a preliminary assessment that the four criteria were met. No written evidence has been presented to the IEO to show that staff ever informed the Board differently before issuing the staff report requesting the SBA.
The revised second criterion reads in part as follows: “Where the member’s debt is considered sustainable but not with a high probability, exceptional access would be justified if financing provided from sources other than the Fund, although it may not restore sustainability with high probability, improves debt sustainability and sufficiently enhances the safeguards for Fund resources. For purposes of this criterion, financing provided from sources other than the Fund may include, inter alia, financing obtained through any intended debt restructuring. This criterion applies only to public (domestic and external) debt. However, the analysis of such public debt sustainability will incorporate any relevant contingent liabilities, including those potentially arising from private external indebtedness” (Decision No. 15931 (16/4), adopted January 20, 2016).
This issue was first addressed in a report by Watson (2008) that was prepared for the 2008 Triennial Surveillance Review (TSR). Pisani-Ferry, Sapir, and Wolff (2011), as part of the 2011 TSR, found that the analysis in national Article IV consultations had rarely taken account of spillovers across countries.
In this connection, the ECB (2015) recommended that the IMF “provide stronger and more clearly formulated policy recommendations on structural reforms, including their estimated impact.”
For example, an IMF economist, in a co-authored paper, examined the heterogeneity of external positions across the euro area and how individual countries could be affected differently by global current account developments (Lane and Milesi-Ferretti, 2007).
The European Commission’s understanding of the adjustment mechanism in the monetary union was also of the price-specie-flow type. EC (2006) argued that the real exchange rate or “competitiveness” was the principal channel of aligning member countries’ cyclical positions following a country-specific shock. (That is, resource costs in a booming economy rise such that activity slows until cyclical conditions move back in line with the euro area average.) The EC’s analysis then documented how the “competitiveness channel” operated in the euro area and called for reforms to promote more rapid and symmetrical price and wage adjustments in order to improve the mechanism.
Nonetheless the staff considered such an event extremely unlikely: “Balance of payments surpluses or deficits could . . . arise in individual members of the monetary union in the event that the union-wide financial system became segmented. For a union like EMU, of course, this would be extremely unlikely” (IMF, 1998).
Likewise, measures were taken within the euro area to strengthen surveillance through agreements on the so-called Six-Pack, Two-Pack, and fiscal compact, which included a macroeconomic imbalances procedure. It is beyond the scope of this evaluation to assess the impact of these measures.
The staff downsizing led to some countries being placed on a 24-month consultation cycle and others being subject to “simplified procedures” involving shorter visits and fewer topics covered in less depth.
Econometric analysis suggests that the size of the initial fiscal disequilibria more than accounts for the difference (Larraín, 2016). The author, in coming to this result, included all five euro area programs. An implication of his finding is that the size of official financing in the euro area was larger relative to the size of the initial fiscal disequilibria than in the Latin American cases.
Leading European economists, writing in February 2011, concluded that Greece had become “insolvent” and that “further lending without a significant enough debt reduction [was] not a viable strategy.” Their estimates also indicated that “the spillover effect from a sustainability-restoring haircut on sovereign debt” on the rest of Europe would be manageable (Darvas and others, 2011).
On October 18, 2010, the French and German leaders agreed in Deauville, France that any future rescue of a euro area country would require a bail-in of private creditors if the debt was judged to be unsustainable. Though it was stated that this policy would take effect from 2013, the agreement created immediate reactions from policymakers and market participants (Forelle and others, 2010). See also Chaffin and Spiegel (2010).
This tightening was tantamount to disallowing the operation of automatic stabilizers, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction. In contrast, the program for Ireland built in flexibility at the outset, allowing fiscal stabilizers to operate.
Given the openness of the Irish economy, the multiplier estimate used in designing the Irish program (about 0.5) was broadly appropriate.
Evidently, IMF staff had revised the multiplier upward to 0.8 by October 2012 (Eichenbaum, Rebelo, and de Resende, 2016).
The IMF’s standard template for debt sustainability analysis consists of debt-to-GDP projections under a few standard scenarios. Given the nature of the exercise, moreover, there is no objective threshold to determine sustainability. For these and other issues, see Schadler (2016).
Based on the number of pages in the initial program documents as a rough proxy for the extensiveness of coverage, structural conditionality in the EU-supported programs was about 1,800 pages for Greece, 1,000 pages for Portugal, and 900 pages for Ireland (Sapir, Wolff, de Sousa, and Terzi, 2014; Park, 2016).
The general public may have had similar perceptions, bolstered by the fact that both the IMF letter of intent and the EC memorandum of understanding were attached to the published IMF staff reports.
Competitiveness-related reforms flowed from the EC’s agenda. The SBA request contained only one structural benchmark related to competitiveness: the preparation of a privatization plan. The Fund’s second program review set a structural benchmark on reforming the collective bargaining system, while the third review set a benchmark on repealing laws on closed professions. The fourth and fifth reviews specified a number of competitiveness-related prior actions (IMF, 2013c).
For example, the objective of cleaning up banks’ balance sheets conflicted with that of shoring up their capital. Given the inadequate financing, both of these objectives could not be achieved simultaneously. As a result, bad loans were evergreened to avoid recognizing them as delinquent.
The initial IMF-supported program included no prior action or benchmark unrelated to fiscal and financial sector reforms.
The latter numbers include structural performance criteria for programs approved during 2008. Structural performance criteria were abolished by an Executive Board decision in March 2009.
In 1997, before the streamlining initiative, the number of structural measures included in IMF-supported programs was 15.3 per year (Takagi and others, 2014).
The staff drew two main conclusions from the recent experience with crisis programs, including those outside the euro area: (i) for countries in currency unions, achieving internal devaluation “is very demanding, requiring ambitious macroeconomic adjustment and structural reforms sustained over a period that can well exceed the standard 3–4 year period of Fund-supported programs”; and (ii) “the growth payoffs from structural reforms in the short term were likely modest, and less than programs may have envisaged, suggesting a need for program design to be prudent about expectations in this regard” (IMF, 2015c, pp. 5, 42).
This idea, adopted in Italy in 1992 in the form of devaluation with a wage freeze, was first proposed by Blanchard (2007) as a way to raise competitiveness in Portugal.
A standard result in public finance is that, in a world of flexible prices and wages, this type of fiscal devaluation would have no impact on labor market outcomes. To have an impact, nominal wages would have to be initially too high and rigid downward. See Eichenbaum, Rebelo, and de Resende (2016).
Jaeger and Martins (2015, p. 20) drew four lessons from this experience: (i) trade-off between the size of required fiscal measures (to offset cuts in employers’ contributions) and political acceptance; (ii) incompatibility of restricting the cuts to the tradable sector with EU competition rules; (iii) price rigidity in the nontradable sector limiting effectiveness; and (iv) perception of unfairness by trade unions and employers.
The Task Force for Greece was set up by the European Commission in the summer of 2011 to coordinate and monitor TA efforts in Greece, in support of the EC’s adjustment programs. In 2015, the European Court of Auditors audited the delivery of TA by the task force, with little reference to the IMF (see ECA, 2015b).
The IMF-World Bank Concordat includes agreed procedures for addressing policy differences between the two institutions, which could involve their respective Executive Boards.
The European Court of Auditors observed that the EC’s accrual-based targets had been “unreliable” as they could not be monitored in real time (ECA, 2015a).
ECA (2015a, p. 27) provides a diagrammatic presentation of the decision-making process in the euro area. See also Pisani-Ferry, Sapir, and Wolff (2013) for a discussion of the relative roles of various institutions, including the IMF, in the troika process.
This differs from the EC’s customary role as an independent principal protecting the EU interest (Pisani-Ferry, Sapir, and Wolff, 2013).
The European Parliament report recommended that, given the potential conflicts of interest, the role of the ECB should be that of “a silent observer” (Karas and Ngoc, 2014).
For example, the SBAs for Antigua and Barbuda (in 2010) and for Saint Kitts and Nevis (in 2011) included program conditions requiring direct action by the Eastern Caribbean Central Bank in the financial sector.
The summing up of the Executive Board discussion in part states: “Directors also noted that where changes in currency union-wide policies are important for program success, the Fund should provide advice through surveillance as warranted. Some Directors considered that the Fund could also seek commitments on union-wide policies if necessary for program success or financing assurances” (IMF, 2015d).
The IEO is currently working with staff to develop a clear protocol for future evaluations.
“Treaty Establishing the European Stability Mechanism between the Kingdom of Belgium, the Federal Republic of Germany, the Republic of Estonia, Ireland, the Hellenic Republic, the Kingdom of Spain, the French Republic, the Italian Republic, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Grand Duchy of Luxembourg, Malta, the Kingdom of the Netherlands, the Republic of Austria, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic, and the Republic of Finland” (http://esm.europa.eu/about/legal-documents/ESM%20Treaty.htm).
The ESM Treaty accepts “preferred creditor status of the IMF over the ESM.”
In 2013, the staff prepared a paper (IMF, 2013a) taking stock of the IMF’s engagement with regional financing arrangements and exploring options for future cooperation. The paper was prepared for a G20–IMF seminar held on the margins of the Spring Meetings and was discussed by the Board in an informal session.