Blog Post

The IMF’s performance on financial sector aspects of the euro area crisis

The recently published in-depth evaluation of the International Monetary Fund (IMF)’s role in the euro area crisis highlights important contrasts in the area of financial services. The IMF provided highly valuable analysis and recommendations to the EU on its banking sector and related policies. In individual countries (leaving aside Cyprus and the second Greek programme, not covered by this evaluation), the financial-sector aspects of the IMF’s interventions were highly successful in Ireland and Spain, ambiguous in Greece, and a missed opportunity in Portugal.

By: Date: August 29, 2016 Topic: Finance & Financial Regulation

Bruegel just published “The IMF’s Role in the Euro Area Crisis: Financial Sector Aspects” in its Policy Contributions series, and the Peterson Institute posted a near-identical text on its website. Both are lightly edited versions of a background paper on financial-sector aspects which formed part of a broader evaluation of “the IMF and the crises in Greece, Ireland and Portugal,” published in late July by the Independent Evaluation Office of the International Monetary Fund. The IEO report, which was accompanied by eleven background papers (including mine), received wide coverage in international media, and prompted a welcome debate on the weaknesses and shortcomings it highlighted at the Fund.

My work evaluated the financial-sector aspects of the IMF’s performance on two levels. For the euro area as a whole, I give the Fund high marks for its ground-breaking analysis of the vulnerabilities of the currency union’s banking policy framework, starting years before the crisis and developed near-continuously during the crisis itself. The IMF was the first public institution, and among the first observers more generally, to identify the vicious circle between banks and sovereign states, which then became increasingly widely acknowledged as the central driver of the euro area crisis, and which euro area leaders memorably pledged to break when first announcing the reform now known as banking union in late June 2012. As early as May 2009, an IMF working paper by Ashoka Mody is the earliest public description I found of that vicious circle, presumably inspired by his experience of Ireland at that time. It was closely followed by a euro-area-wide analysis by Silvia Sgherri and Edda Zoli emphasizing the links between sovereign risk and financial-sector fragility.

In terms of euro-area-level policy recommendations, the IMF was an early advocate of what we now call banking union, including through a series of publications in 2007 and a detailed proposal in 2010, which can be seen as the precursor of the euro area’s single resolution mechanism that came into force earlier this year. (My own first contribution to the banking union debate in 2007 was largely inspired by joint work with two IMF economists, Jörg Decressin and Wim Fonteyne.) The Fund was an equally forceful champion of banking union in the immediate run-up to euro area’s decision to initiate it, with a landmark blueprint provided in a January 2012 speech by the IMF’s managing director, Christine Lagarde. The IMF’s advocacy of European banking policy was not entirely continuous and was occasionally weakened by internal disagreements, but deserves significant credit for its contribution for the major steps the euro area has taken since 2012 towards banking union, arguably the most important structural reform adopted by the euro area in response to the crisis.

At the level of individual countries, my assessment highlights the contrasts between different programs, as does the IEO’s main report. On financial-sector aspects, the first Greek program (2010-12) successfully prevented short-term financial instability but couldn’t avert the sharp deterioration of Greek banks’ balance sheets in the run-up to the sovereign debt restructuring of March 2012. The Irish program (2010-13) was as close as it gets to a textbook example of effective banking sector restructuring. By contrast, the Portuguese program (2011-14) missed the opportunity to bring Portugal’s banking sector back to soundness, a collective failure for which Portugal is now paying a significant price. The Spanish program of 2012-14, to which the IMF contributed in major ways even though not under the “troika” arrangement, was, like Ireland, a remarkable success. The second Greek program (2012-16) and Cypriot program (2013-16) are not covered by the IEO evaluation because they were still ongoing when most of the evaluation work was being done. The paper attempts to explain how these diverse outcomes resulted from different country contexts but also from internal circumstances within the Fund.

The paper’s title and context clarify what it is and isn’t. First, it was written as part of an evaluation of the IMF. While a number of facts and assessments are provided on other actors such as national governments and EU institutions, these are only intended to help pass judgment on the performance of the IMF itself. In other words, the paper does not seek to evaluate the actions of any of these governments and institutions, even though it provides materials that may be used for such evaluations. Second, the paper focuses on financial-sector aspects, and to be more specific, on banking-sector issues, since banks represent the overwhelming majority of financial intermediation in the euro area. Fiscal and structural policy challenges, in particular, are covered in other parts of the IEO evaluation but are not assessed in this text. Third, as highlighted in a disclaimer on the background paper published by the IEO, the views expressed in the paper are mine and not those of the IEO. As the IEO puts it, background papers “are published to elicit comments and to further debates.” Only the main report represents views of the IEO itself.

My evaluation supports the view that the euro area crisis is best understood as a set of complex interactions between fiscal and financial-sector developments, even though mainstream narratives tend to focus single-handedly on the fiscal aspects (and, correspondingly, on Greece). It also highlights the IMF’s contribution as a highly valuable partner for the euro area throughout the crisis, despite flaws on which the IEO project has shed an unforgiving light. The IMF has acted as a welcome check against European tendencies for insular and inward-looking thinking, and has provided important insights to the European policy process based on the Fund’s experience elsewhere in the world, even though European policymakers haven’t always heeded the IMF’s advice as they should. The Fund should try to build on its successes and learn from its mistakes to keep bringing essential value to European policy decision-making in the years ahead.

Finally, I wish to express my personal gratitude to the IEO, particularly to Shinji Takagi who led this evaluation project and to the Office’s Director Moises Schwartz, for having allowed me to participate in their collective effort. The IEO, which started in 2001, is a unique institution. It has once again demonstrated its capacity for ruthless truth-telling to the IMF, which in turn supports the Fund’s capacity for ruthless truth-telling to its member countries. The ability of the IEO to prepare and publish independent assessments, and to enable background papers authors to express independent judgments of their own, is truly impressive. For me, contributing to the IEO’s work over the last eighteen months has been a great honour and privilege.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

May
21
10:30

Europe after Sibiu: Towards differentiated integration?

A comprehensive follow-up to the Informal European Council in Sibiu, Romania.

Speakers: Andrew Duff, John Erik Fossum, Paweł Karbownik and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

European bank resolution plans are undermined by a lack of transparency

The discussions of the now-aborted merger of Germany’s two largest banks underlined supervisors’ concerns over creating banks that are too big or too complex to fail. While European banks are increasingly funded through securities that could be subject to a bail-in, transparency over how any resolutions would unfold is as yet very poor.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: May 15, 2019
Read article More on this topic

Blog Post

Germany’s even larger than expected fiscal surpluses: Is there a link with the constitutional debt brake?

Germany is having a political debate on the adjustment of its budgetary plans due to revised forecasts, and an academic debate on the debt brake. Yet, since 2011, general government revenues and surpluses have been systematically and significantly higher than forecast. The German surplus reached 1.7% of GDP in 2018. This bias did not exist from 1999-2008 before the introduction of the debt brake. While the IMF also got its forecasts of German surpluses wrong, the extent of the bias is larger for the German government’s forecasts. These data suggest that the political debate should focus on the debt brake and its implementation rather than on how to close the budgetary ‘hole’.

By: Catarina Midoes and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 13, 2019
Read about event More on this topic

Past Event

Past Event

Can the euro area weather the next crisis?

Is the euro area strong enough to make it through another crisis? What reforms are still needed. Klaus Regling will join us for this roundtable event in Washington DC to discuss these questions.

Speakers: Masood Ahmed, Klaus Regling, Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: 2055 L Street NW, Washington DC 20036 Date: April 11, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Frans Timmermans

The sixth event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Mehreen Khan, André Sapir and Frans Timmermans Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 11, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Manfred Weber

The fifth event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Anne-Sylvaine Chassany, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 9, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Jan Zahradil

The fourth event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Jim Brunsden, Maria Demertzis and Jan Zahradil Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 4, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Luis Garicano

The third event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Luis Garicano, Mehreen Khan and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 3, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Bas Eickhout

The second event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Bas Eickhout, Guntram B. Wolff and Rochelle Toplensky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 2, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Yanis Varoufakis

The first event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Maria Demertzis, Martin Sandbu and Yanis Varoufakis Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 26, 2019
Read about event More on this topic

Past Event

Past Event

Diverging narratives: European policies and national perceptions

Who tends to get the blame for the Euro crisis in national media? What do national politicians think about the EU and EMU?

Speakers: Pierre Boyer, Juha Pekka Nurvala, Giuseppe Porcaro and Laura Shields Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 27, 2019
Read article More on this topic

Blog Post

The European Union must change its supervisory architecture to fight money laundering

Money laundering scandals at EU banks have become pervasive. The authors here detail the weaknesses the current AML architecture's fundamental weaknesses and propose a new framework.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: February 26, 2019
Load more posts