Blog Post

Not so low: A review of Paul Blustein’s book on the IMF and the euro area crisis

"Laid Low" is an important addition to the burgeoning literature on the euro-area crisis and its main contribution is to assemble essential factual material for further analysis.

By: Date: November 3, 2016 Topic: European Macroeconomics & Governance

The International Monetary Fund’s involvement in the euro area crisis has raised a lot of controversy. According to a widespread conventional view, the “Troika” of creditor institutions – the IMF, the European Commission, and the European Central Bank (ECB) – demanded excessive fiscal austerity of Greece and other errant countries in return for their assistance, and this stance not only failed to restore Greek public credit but also prolonged economic weakness in other countries including Portugal and Italy. Instead of calling for austerity, according to this view, the IMF should have forced a reduction of Greece’s debt (in other words, engineered an orderly default) from the start of its involvement in the spring of 2010. The IMF is also blamed for ignominiously forcing Ireland to bail out senior bondholders of its failed banks in November 2010 under orders from a dogmatic ECB, itself captured by European financiers.

An educated and comparatively nuanced version of this storyline was masterfully told by Peter Spiegel, then the Brussels bureau chief of the Financial Times, in a 3-part reporting series that was later published as an ebook titled How the Euro Was Saved. A less well-informed version of the same critique is voiced by Nobel Prize laureate Joseph Stiglitz in his recent book The Euro: How a Common Currency Threatens the Future of Europe, variations of which inform opinions on the euro area among (too) many observers in Europe and globally.

Paul Blustein’s useful new book, Laid Low: Inside the Crisis that Overwhelmed Europe and the IMF, at the same time propagates and debunks the conventional wisdom. This ambiguous contribution reflects how far we still are from a settled reference narrative of the euro-area crisis. Blustein, a former Washington Post and Wall Street Journal economic reporter, is one of the world’s most seasoned journalistic observers of the IMF and now works for the Center for International Governance Innovation (CIGI), which is also the book’s publisher. The book’s unique perspective is to observe the euro area crisis through the lens of the IMF, an important though ultimately peripheral protagonist. This leads Blustein to analyse two separate but interconnected issues, the crisis itself and the IMF’s performance in addressing it.

In several ways, Laid Low follows the standard, formulaic, Greece-centred account of the crisis. More than half the book’s chapters are entirely or mostly about Greece. Some major non-Greek episodes involving the IMF, such as the assistance program for Portugal, are near-entirely omitted. The introductory second chapter (Chapter One being a digression on Strauss-Kahn’s sexual issues) and the concluding Chapter Twenty, as well as the book’s title, embrace a narrative of the Fund “laid low” by abusive political interference from Europe that prevents it from fulfilling its technocratic mandate with philosopher-kingly integrity. Here Blustein refers to an IMF “bruised and enfeebled,” its “credibility sapped” by yielding to Europe’s masters. “One word aptly describes the IMF’s role as junior partner in the Troika: travesty,” he writes in his conclusion.

But in the 17 descriptive chapters between introduction and conclusion, Blustein’s chronicle is too honest to support this indictment. His storytelling is highly engaging, and his reporting is superb. Not only does he bring together an astonishing variety of sources (journalistic, policy, academic); he also adds a number of scoops of his own. For example, he reveals how Strauss-Kahn attempted in April 2011 to walk away from the assistance program for Portugal, which was then being negotiated, unless it included conditions on euro-area policy in addition to those on Portugal. (Wolfgang Schäuble, Germany’s finance minister, called Strauss-Kahn’s bluff.) Such new information is significant, since one of the more compelling criticisms made of the IMF is that it never insisted on euro-area-level conditionality, an option that is not set out in the IMF’s formal tools but conceivable in the negotiation of individual programs. In the same vein, Blustein reveals that in the fall of 2012, IMF staff had wanted to include direct recapitalization of Cypriot banks by the European Stability Mechanism, a newly-created euro-area fund, in the forthcoming assistance program for Cyprus, but that the IMF didn’t insist on it when EU leaders expressed their reluctance in late 2012.

Against the conventional critique, Blustein demonstrates that, while Strauss-Kahn did envisage a restructuring of Greek sovereign debt in the spring of 2010 (an option known in IMF lore as “plan B”), it was never a genuine option, not least because of the opposition of the Greek government itself. IMF staff was divided on the principle of restructuring, with some departments (e.g. Research and Strategy) maintaining that it would be eventually inevitable and others (most notably Europe and Fiscal Affairs) arguing it might be avoided altogether. Similarly, Blustein refutes the view that the November 2010 decision on Irish banks was the result of a unilateral diktat of the ECB, and correctly emphasizes the role of then-US Treasury Secretary Tim Geithner in rejecting a stance of “burning the bondholders” that might have created additional instability in European finance. On a broader level, Laid Low goes some way towards puncturing the fiscal-and-sovereign-debt-only narrative of the euro-area crisis, most prominently in Chapter 15 which aptly describes the bank-sovereign vicious circle and the inception of Europe’s banking union. From these chapters, the picture that emerges of the IMF is actually that of a strong institution, more able than most large organizations to learn from its mistakes, and generally effective in its engagement with Europe with a constant willingness to challenge the area’s occasionally incompetent leaders. While participating in the Troika, the IMF never compromised its decision-making independence as regards the use of its resources. It was not always right, as Blustein illustrates with the examples of Latvia in 2009 in Chapter Four, or of Cyprus in 2013 in Chapter 16. But it was often successful, and almost always constructive.

To be sure, the IMF was constrained by European politics. But this was the flipside of the fact that in the euro-area crisis, for the first time in more than three decades, the IMF has been intervening close to the core of the global financial system rather than in its less systemic periphery. An internal IMF document of January 2012, quoted by Blustein at the start of Chapter 14, makes it refreshingly clear: “No economy – whether advanced, emerging or low income – is immune to an escalation of the [euro-area] crisis. (…) Whereas country shocks in the 50 years prior could largely be considered idiosyncratic in that they did not destabilize the entire system, shocks in the advanced economy core (…) are now effectively systemic.” There can be little doubt that, should it be called to help with a crisis in China or the US (God forbid), the IMF would not have a fully free hand either – even though China and the US, unlike Europe, are not overrepresented on the IMF’s executive board. But the mere fact that the Fund intervened in “core” Europe demonstrates its relevance and its strength rather than any weakness. And the constraints on IMF staff and management decisions from the Fund’s shareholders are not a problem, but rather the mark of a functioning governance framework. This framework can be improved – for example, by reducing Europe’s unjustifiable executive board overrepresentation as Blustein recommends – but the book does not make it appear fundamentally unsound.

This framing of the IMF’s role in the euro-area crisis also provides greater clarity regarding its analytical blunders. If anything, Blustein is often too forgiving of these, perhaps inevitably given his reliance on interviews with current or former IMF staff. The main error on Greece was not to impose excessive austerity, or even to delay the inevitable restructuring. Miranda Xafa, a knowledgeable analyst and former IMF official, calculated that, had this happened in May 2010 instead of March 2012, the additional reduction in public debt would have been around 16 percent of GDP – a significant but hardly decisive difference. The IMF’s bigger mistake was an overestimation of the institutional strength and capacity to reform of Greece, a so-called advanced economy and, as a founding member of the Organization for Economic Co-operation and Development, presumed to be functionally governed. Similarly, the IMF erred in trusting the assessments of the local banks’ soundness by the Portuguese authorities, which it should have second-guessed instead. One lesson here is that the IMF’s traditional distinction between “emerging” and “advanced” economies is increasingly counterproductive, as other recent developments also illustrate. The IMF would be well-inspired to abandon this distinction altogether.

Overall, and despite the misleading nature of its title and of some of its framing, Laid Low is an important addition to the burgeoning literature on the euro-area crisis. Its main contribution is to assemble essential factual material for further analysis, complementing other books such as Carlo Bastasin’s Saving Europe or Neil Irwin’s The Alchemists, as well as the in-depth study published last July by the IMF’s own Independent Evaluation Office (IEO). These and other forthcoming volumes will hopefully allow a gradual shift in the public’s understanding of the euro-area crisis, from a cartoonish Hellenic-centered morality tale to a more complex but also more accurate story of financial fragility, multi-level governance, and multiple reverberations between banking, fiscal, and monetary imbalances.

Note: the author was a member of the IEO team that prepared the evaluation report mentioned in this post’s last paragraph. The content of this post is not based on the author’s work for the IEO, nor does it in any way represent a view of the IEO itself.


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 article More on this topic More by this author

Blog Post

Is Greece’s labour market bouncing back?

After rapid increases in unemployment and large wage reductions, Greece’s labour market is showing signs of recovery. Certain sectors of the economy are showing strong employment growth, which could hint at a broader economic recovery.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 14, 2017
Read about event More on this topic

Past Event

Past Event

Lessons for the future governance of financial assistance in the EU

On 14th June, Randall Henning will present his latest book on the Euro crisis and we will discuss how financial assistance should be governed in the euro area in the future.

Speakers: Servaas Deroose, C. Randall Henning, Rolf Strauch and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 14, 2017
Read about event More on this topic

Past Event

Past Event

CANCELLED - What should be Greece's next growth model?

Due to unforeseen circumstances, we will have to cancel this event.

Speakers: Kuriakos Mitsotakis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 8, 2017
Read article More on this topic More by this author

Opinion

Debt relief or a fourth financial assistance programme for Greece?

The Eurogroup faces a difficult choice on Greece — implementing a debt reduction plan drastic enough to make a return to market borrowing possible, or agreeing to a fourth financial assistance programme and continuing to fund Greece at the preferential lending rate.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: May 22, 2017
Read article Download PDF More by this author

Working Paper

Regional and global financial safety nets: the recent European experience and its implications for regional cooperation in Asia

Comparing and evaluating financial assistance programmes of four euro-area countries (Greece, Ireland, Portugal, and Cyprus) and three non-euro-area countries (Hungary, Latvia, and Romania) of the European Union in the aftermath of the 2007/08 global financial and economic crisis. Asian countries can draw several lessons from European experiences.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance Date: April 20, 2017
Read article More on this topic More by this author

Blog Post

European identity and the economic crisis

What’s at stake: the EU prepares to mark the 60th anniversary of the Treaty of Rome, and the European Commission has presented a white paper “on the future of Europe”. However, some have argued that Europe is going through a serious identity crisis, whose roots are to be found in the economic crisis and whose implications could challenge further steps towards integration. We review the recent contributions to this debate.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 6, 2017
Read article More on this topic More by this author

Blog Post

Should we worry about Greek banks?

Earlier this month, the IMF and the European institutions clashed over conditions for sustainability of the Greek debt. One of the main disagreements seems to be the evaluation of the Greek banks’ health. Whose assessment should be trusted and are there reasons to worry?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: February 23, 2017
Read article More on this topic More by this author

External Publication

EU economic governance: euro area periphery lessons for Central and Eastern European countries

An analysis of macroecnomic developments shows that Central and Eastern European (CEE) EU member states fared much better in the aftermath of the crisis compared to euro-area periphery countries. Furthermore, they have a better chance to avoid the problems that the euro-periphery countries faced before the crisis.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 9, 2016
Read article More on this topic More by this author

Blog Post

Challenges to debt sustainability in advanced economies

The gross general government debt-to-GDP ratios in many advanced economies have reached the highest levels in peacetime history and continue to grow, putting into question sovereign solvency in these economies.

By: Marek Dabrowski Topic: European Macroeconomics & Governance Date: December 8, 2016
Read about event More on this topic

Past Event

Past Event

Game Over – The Inside Story of the Greek Crisis -Drawing the broader lessons for Europe

Solvay Brussels School and Bruegel are co-organizing an event at which George Papakonstantinou and André Sapir will discuss the Greek crisis and its social and economical impact over the last 6 years.

Speakers: André Sapir, Guntram B. Wolff and George Papakonstantinou Topic: European Macroeconomics & Governance Location: Avenue Franklin Roosevelt 42 Brussels, 1050, Ixelles Date: December 6, 2016
Read article Download PDF More on this topic More by this author

Policy Contribution

Are advanced economies at risk of falling into debt traps?

One of the consequences of the global financial crisis has been rapid growth in public debt in most advanced economies. This Policy Contribution assesses the size of public debt in advanced economies and considers the potential consequences of sovereign insolvency.

By: Marek Dabrowski Topic: European Macroeconomics & Governance Date: November 10, 2016
Read article Download PDF More on this topic More by this author

Working Paper

Income convergence during the crisis: did EU funds provide a buffer?

This paper shows that economic convergence continued during the crisis for the EU as a whole, although at a slower pace, but for regions in the EU14, and especially in the euro area, convergence appears to have stopped during the crisis, or even switched to a divergence path.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: October 18, 2016
Load more posts