THE IMF IS THE ONLY FIRE BRIGADE IN TOWN
Andrew Tyrie on:
- why Greece is probably better off out of the Eurozone
- on how the IMF is the only organisation who can ensure an orderly withdrawal
- and how the IMF’s credibility is now on the line
There are three possible outcomes to the Eurozone crisis: deep-seated reform to restore competitiveness to countries such as Greece; permanent transfers payments from higher productivity countries to lower productivity countries; or exit of struggling countries, writes Andrew Tyrie MP in The IMF and the Eurozone: some observations, published on Wednesday 6 June by the Centre for Policy Studies.
The first two of these are increasingly unlikely: “we should therefore take advantage of the breathing space afforded by the latest bailout to develop a contingency plan for Greece to leave the Eurozone… The fundamental issue troubling the market is not the liquidity of government securities markets but the solvency of government finances. The European Central Bank can’t solve that problem, and shouldn’t try.”
He warns of the danger to Spain: “The markets doubt the capacity of the Spanish Government to service the debt. Among other things, they doubt whether the Spanish tax system can raise the necessary revenue while the government simultaneously engages in the deep structural reforms needed to improve productivity and secure internal devaluation. Without those enduring reforms, another Eurozone crisis would emerge in time, even after a bailout.”
He continues: “Only the IMF has the necessary detachment and economic credibility to help sort out this crisis… These will be testing times for Christine Lagarde – her credibility, as well as that of the IMF, is on the line… At the moment the IMF is treating the ECB and the Commission as partners in discussions. This should end. Both European bodies have an existential conflict of interest. The ECB in particular also has a financial conflict, arising from its holdings of government debt and its enormous exposures to the national central banks of the deficit countries in the Euro area.”
“The IMF’s job would not be to decide among the policy choices but to evaluate them, present them to the Euro area governments, and put pressure on those governments to make a sustainable choice.
Its influence could be decisive… Its judgement on the sustainability of any plan would carry enormous weight in financial markets. That fact considerably strengthens the IMF’s hand.”
“The IMF’s major non-European members should also speak up. More than three quarters of the voting power in the IMF belongs to these non Euro-area countries. They should instruct the IMF to take a detached view. They may need to watch like hawks to fend off special pleading. Never has the IMF’s well established un-sentimentality been more needed.”
Tyrie concludes: “Three simple points which, taken together, look persuasive to me. First, there is a non-negligible risk of a serious regional and a possibly global economic fire. The Eurozone crisis has the capacity to engulf us all. In that sense, we are all in this together. Second, non-Eurozone countries should not rely on the Eurozone to do the hard work for us. Their decision making structure is flawed… The third reason for backing the IMF is the simplest. They are the only global fire brigade we have.
AS Robin Niblett, Director of Chatham House, remarks in a Foreword to this paper: “This could not be a more timely paper… [it] offers a bold proposal: the IMF should no longer serve as an ‘enabler’ of Eurozone fiscal and political mismanagement. Instead, it should return to its role as a detached and dispassionate adviser and, if necessary, as a key financial supporter of its European members… EU leaders and institutions have proven incapable not only of gauging their own vulnerabilities, but also of getting ahead of the curve in terms of agreeing upon a coherent set of policy steps and institutional initiatives. Given the effects of their inability to do so on the global economy as a whole, engaging the IMF to play a far more active and traditional role in helping manage the Euro-crisis could be a critical part of the near-term solution.”