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Ryan L. Jackson

The IMF’s “doves” against the German “hawks”? The Fund and the austerity policy in Europe

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The International Monetary Fund (IMF) plays a major role in promoting “sound” economic policies. But as Ben clift Writes, there have been significant shifts in the IMF’s economic ideas since the global financial crises and the euro zone. The IMF now often disagrees with some European leaders on key issues, undermining the idea that economic policy can be seen as a purely technocratic and scientific endeavor, and reducing the IMF’s impact on politics in Europe.

Discussion at IMF / World Bank Spring Meetings at IMF Headquarters on April 22, 2018, Credit: IMF Staff Photo / Stephen Jaffe (CC BY-NC-ND 2.0)

The recent spring meetings of the IMF and the World Bank with finance ministers and central bankers are one of the main forums where the IMF fulfills its mandate as intermediary of international economic coordination and its self-proclaimed role. world arbiter of a “healthy” economic policy. Christine Lagarde recently set the political priorities of the IMF, delivering clear messages to European policymakers on how to improve economic growth and stability on the continent. Continuing a now well-established IMF tradition, Lagarde implored Germany to “use its excess savings to increase its growth potential”, highlighting additional growth-enhancing opportunities for “investments in physical infrastructure and digital “.

As indicated, in the midst of the (at best partial) resolution of the eurozone crisis, there is a big day between the policy recommendations of the IMF and the opinions on appropriate economic policy emanating from the German government, d ‘other European budget hawks and key European institutions, notably the European Commission and European Central Bank.

The IMF seeks to influence and shape the debate on European economic policy, by encouraging more activist national economic policies in support of growth, and to strengthen the systemic risk reduction capacity of the euro area architecture , thus expanding the political space of European governments. Countercyclical policy can, the IMF stresses, be extremely important in reducing production losses resulting from recessions and economic crises. The positive role of public investment and fiscal policy in stimulating economic growth is constantly underlined, especially for advanced economies with “fiscal space”.

Not your grandmother’s IMF

As I detail in my new book, there have been significant shifts in the Fund’s economic ideas since the eruption of the global financial crises and the Eurozone. These changes in the thinking of the Fund made debates more heated within European austerity policy, with the Fund’s views on the effectiveness and conduct of fiscal policy after the crash, as well as on the size and forms the financial firewalls and safety nets required for effective financial stabilization, increasingly at odds with major European players.

The IMF’s claims to legitimize economic knowledge depend on the perception that economic policy making is a technical and scientific process. This is important for the authority of the Fund, so that its views gain ground and are taken into account. The IMF’s quest for “traction” sees it attempting to exert its influence by shaping the meanings attached to “sound economic policy”. This implies that the Fund selects or prioritizes the economic ideas on which to draw to inform policy recommendations, and the criteria by which the policy will be judged.

Since 2010, major differences of views have appeared on economic policy between the members of the Troika (EC, ECB, IMF) engaged in European programs. These political challenges to economic ideas have their roots in underlying ideological assumptions about the effectiveness of fiscal policy. They have been difficult to contain within the confines of a facade of economic policy as a purely technocratic and scientific enterprise.

The battleground for a “healthy” fiscal policy

A central battleground during the eurozone crisis has been over what constitutes “healthy” and “unhealthy” fiscal policy, with the ECB, the German finance minister and others often calling for more powers to enforce the fiscal austerity. The IMF mobilized its knowledge base and scientific reputation to correct what key Fund figures saw as flawed premises for austerity policies.

The Fund’s search for higher budget multipliers proved influential in the depths of the Great Recession. The IMF, along with some European governments, argued for slower and less severe fiscal consolidation to protect growth as eurozone economies struggled to recover. IMF support for French calls to ease restrictions in the Stability and Growth Pact has been an important factor in the European Commission’s more lenient approach to delaying deficit reduction.

The IMF also advised against a hasty exit from stimulus, rebutted the idea that fiscal consolidation is in itself “growth friendly” and stressed that fiscal consolidation can be doomed to failure. As the eurozone recession continued, the IMF advised further countercyclical fiscal policy interventions to support the recovery. The Fund’s policy advice, supported by empirical evidence, called for a “less now, later” approach to consolidation for those with fiscal space.

Firewalls, banking union and breaking the “catastrophic loop”

Another key point of divergence concerns how to rebuild European financial stability and credibility. The IMF has relentlessly called for the muscular use of public power, the architecture of the euro zone and the actions of central banks to limit contagion in financial markets. IMF research has consistently emphasized the takeaway from the financial crisis and the eurozone crisis: Financial stability needs to be more actively promoted and supported by governments, central banks and bodies like the IMF. This cannot be taken for granted. As Lagarde says, “we must ensure the security of our financial systems by avoiding a dismantling of the regulatory framework put in place since the global financial crisis to strengthen capital and liquidity cushions”.

The ECB, the German government and others have seen bailouts, ECB bond purchases and firewalls built in terms of “moral hazard”. It was tantamount to letting debauched governments get away with it and throwing money after evil. They found that market pressure, which underdeveloped backstops, continued as an incentive for the reforms needed to strengthen competitiveness and fiscal discipline. The IMF has always hoped that the banking union could reduce systemic financial risks by breaking the “catastrophic loop” between fragile financial institutions and overburdened sovereigns. Yet the Fund’s aspirations for a “full” banking union failed due to lack of support from European partners, the European Commission and the ECB.

The limits of the “traction” and influence of the IMF in Europe

This highlights a coherent theme: the limits of the influence of the IMF, despite its central role in the responses to crises in the euro area through the troika. In formulating EU programs, the Fund argued unsuccessfully with Troika partners for initial debt restructuring and lower levels of fiscal consolidation. On both fronts, the Fund’s failure to impose itself has worsened the crisis, especially for Greece. Overall, the IMF has had limited impact on the austerity-centric austerity policies of European authorities and governments. His persistent calls for strengthening fiscal and financial arrangements to reduce systemic risks for the euro area have gone largely unanswered. Given the limits of the IMF’s influence on European economic policies, there is reason to doubt the sustainability of Europe’s economic and financial stability.

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Note: This article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics.


About the Author

Ben clift – University of Warwick
Ben Clift is Professor of Political Economy at the University of Warwick, UK. His latest book, The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis, was recently published by Oxford University Press. His broader research interests focus on comparative and international political economy, and he has published extensively on the IMF, French and comparative capitalisms, the politics of economic ideas and the autonomy of economic policies.

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