By Ignacio Ramirez Cisneros
Some considerations on the IMF’s Independent Evaluation Office (IEO) latest assessment on the handling of the euro crisis.
If decisive large scale interventions on the part of the Eurosystem would have been enough to quell financial panic –along with the strategic functioning of the EZ large transactions payment platform, Target2, allowing capital repatriation by core EZ financial agents- the IMF should not have had a role in the crisis resolution process to begin with. The IMF is brought in when a country is in need of foreign reserves to bridge temporary difficulties in the balance of payments or when debt restructuring is imperative. The first case does not apply to any of the main three EZ countries that turned to the IMF for assistance, since the large majority of capital outflows were to EZ partners, and in any case almost all liabilities were euro denominated.
The second case does not apply either as both debt issuance and NCB liabilities are nominally uniform. As stated above, this rules out insolvency since current obligations do not need to be funded externally –i.e., by borrowing any other reserve currency. In this sense, the words of EU Commissioner Joaquín Almunia in 2010 that ‘Greece will not default. In the euro area, default does not exist’, conform to the actual workings of monetary policy operations and the fact that each NCB keeps its own accounting. The latter was taken advantage of in ELA acceptance of Greek debt when the ECB decided on more than one occasion not to accept it as collateral in bank refinancing operations.
Therefore, if the actual working monetary mechanisms of the Eurosystem appear to rule out default due to foreign liability funding stress, then structural adjustment itself, in the traditional IMF way, was also not of immediate urgency. Not of immediate urgency does not mean, however, ‘not necessary’. In light of the higher inflation rate and higher unit labor costs with respect to the main core EZ member, Germany, and absent the exchange rate adjustment mechanism, some sort of ‘structural adjustment’, preferably in the form of an infrastructure investment plan (similar to the one proposed by Bibow), was and still is necessary in the peripheral EZ.
However, this is one reality that can and should have been dealt with separately from the immediate balance of payments crisis triggered by the capital account reversal that hit hard in 2010. As mentioned previously, the Eurosystem should have dealt with the sudden stop of debt flows into peripheral EZ member countries by uncapped purchases of troubled assets to quell the immediate panic and dishearten the financial raiders. The structural deficiencies on the other hand, should not have been simultaneously handled in emergency funding negotiations with the Troika, which mainly sought to ‘reestablish market confidence’.
The structural CA deficits of deficit EZ countries reflect their peripheral nature regarding trade and industrial policy. They cannot be overcome in such a short period of time without severe economic dislocation of resources and resultant loss of output –even more so for the EZ nations since devaluation is not a possibility. It is one thing to strike down panic and capital raiders, who take advantage of pro-cyclical herd behavior and peer emulation, but it is another thing to expect commercially weaker areas to increase internal savings, transform their productive infrastructure and become trade surplus nations.
Again, it is one thing to help the crisis hit members regain access to international, especially intra-EZ, credit markets and quite another to make them ‘competitive’. Each one of these economic problem situations responds to different causal conditions and, most importantly, fundamentally different time frames.