Thursday, April 9, 2015
The Role of the IMF in the Euro Crisis
Centre for International Governance Innovation
April 9. 2015
On the eve of the IMF Spring Meetings in Washington, beginning April 12, with the euro crisis anticipated to sit front and centre in the discussion, it’s necessary to reflect on the role the IMF has — and hasn't — played in this catastrophe.
The Greek crisis of 2010–15 is one of the most severe post WWII crises, with real GDP down by 25% over six years and unemployment up to 27%. The Greek debt restructuring of March 2012 was the largest in history, yet it failed to restore debt sustainability. The IMF is often blamed for this outcome, but critics overlook some important facts.
In the decade preceding the global financial crisis we can discern the following trends in the Euro area periphery: Greece’s per capita income growth was among the highest in 1997-2007, second only to Ireland’s growth (Ireland 54%, Greece 43%, Spain 27%, Portugal 17%, Italy 14%, based on the IMF’s WEO data). However, Greece’s public debt service ratio rose by ten percentage points of GDP over this period compared with large declines elsewhere (-38% in Ireland, -30% in Spain, -14% in Italy vs. an increase in Portugal from very low levels). Greece’s higher living standard was fueled by a debt-financed consumer boom, sowing the seeds of today’s debt crisis. Instead of focusing on past profligacies, the Greek media —driven by special interest groups — often portray the current crisis as being the result of IMF policies. The IMF needs to strike back when such distorted views are voiced in the media, threatening to take hold in public opinion.