How the IMF punctured the insane dreamworld of eurozone elites
The IMF's objection to the Greek bailout is indicative of the deep split between European leaders and economic reality
With its economy in tatters, its government defaulting, and its banking sector collapsing, the Greek parliament voted on Wednesday to accept the eurozone's new terms: more tax increases, more cuts to an already embattled social safety net, and an unprecedented level of European micromanagement of Greek fiscal and labor policy. In exchange, Greece will get a new bailout infusion to keep it afloat.
It was the latest dramatic turn in the ongoing drama of the Greek economic crisis, made all the more poignant by the 11th-hour arrival of what many might consider the most unlikely defender imaginable: the International Monetary Fund.
Along with a mix of banks, countries, and eurozone institutions, the International Monetary Fund (IMF) is one of the primary holders of Greece's debt. It's been a central player in the previous bailouts and austerity packages, and has long been a bete noire of the international left and Greece's ruling Syriza party.
So imagine everyone's surprise when the IMF upended expectations on Tuesday by insisting that the third bailout agreement include some significant measure of debt forgiveness for Greece.
Specifically, the IMF's report gives the eurozone creditors three options, or some mix thereof: significantly increase the bailout funds going to Greece for an extended period, massively decrease the stock of debt Greece currently owes, or at least retool that stock so Greece has a far longer grace period — the IMF recommends 30 years — before it has to start repaying that debt.
The IMF isn't the first to propose this solution — none other than U.S. Treasury Secretary Jack Lew also called for it — but the Germans in particular have refused point blank to consider it.
The eurozone made its latest offer to Greece — which included no debt writedown — earlier this week, after Germany and the other creditors had actually already seen the IMF’s report. So by going public with it now, the IMF is making what the New York Times described as a "tactical move." Even with last night's vote, aspects of Greece's fate remain in limbo, so the IMF may yet shift the balance at the bargaining table. No longer is it Greece versus everyone else. Now it's Greece versus most everyone else, with the IMF still demanding massive concessions from Greece, but suddenly demanding massive concessions from the other side as well.
It's an odd place to be in the political playing field of international economics. But the IMF has found itself there more and more in recent years. After the 2008 economic collapse, elite politicians and officials on both sides of the Atlantic became convinced that austerity — raising taxes and cutting social safety net spending to bring a government budget into balance, often also accompanied by tight monetary policy — was the responsible and serious response to the crisis. Then the IMF released a series of reports effectively admitting that austerity is incredibly destructive during periods of economic weakness, driving wealth and job creation further into the ditch. Perversely, it even increases the very debt burden it's ostensibly aimed at alleviating, because the scale of economic output shrinks far more than the stock of debt does.
Here in the U.S., Republicans and conservatives had long pointed to a paper by economists Carmen Reinhart and Kenneth Rogoff that claimed economies stop growing when government debt reaches 90 percent of GDP or so. But in 2013, in a spectacularly public meltdown, a series of errors were discovered in their work that completely obliterated their finding when corrected. In fact, deeper dives into their data suggest they got the causal arrow backwards: Economic crises lead to higher debt, not the other way around.
In the U.S., the Federal Reserve did a relatively good job running loose monetary policy, sparing the country from the worst effects of sequestration and state budget cuts. Europe was not so fortunate.
What's so incredible is that, in the midst of all this, those trans-Atlantic elites remain convinced of austerity's unassailable sobriety. The very language of the IMF’s reports embody the Kafkaesque position it finds itself in: The institution's research arm dutifully puts together sober economic analysis showing that budget surpluses and tight money are poison in the aftermath of recessions, and then its public reports have to find some way to present these findings to international elites without endorsing the policy conclusions they obviously imply.
Former Greek Finance Minister Yanis Varoufakis, who took part in the negotiations, summed up the absurdity to the New Statesman. "There was point blank refusal to engage in economic arguments," Varoufakis said. "You put forward an argument that you've really worked on — to make sure it’s logically coherent — and you're just faced with blank stares."
"You might as well have sung the Swedish national anthem."
And it's not as if the IMF is acting like a merciful angel here. It's still in favor of completely reworking Greece's socioeconomic compact in a neoliberal direction. It's merely acting like a creditor that actually wants to get paid by its debtor. After all, if Greece is forced to destroy itself economically, it won't be able to pay anyone anything. (Amusingly, the IMF's own recommendations rest on the assumption that Greece can run budget surpluses for decades, and will soon shift into rapid and sustained economic growth. If that doesn't happen — and it almost certainly won't — keeping Greece's economic situation and its debt payments sustainable will require even more radical solutions than the IMF is proposing.)
At this point, in other words, it's actually an improvement for Greece that one of its creditors is suddenly behaving like a coldly rational profit-maximizer. The rest of its creditors can't even manage that, and are instead indulging every frivolous tribal impulse, moralistic fable, and raw ideological whim. It's a remarkable portrait of a governing elite completely unshackled from any incentive or need to actually engage with a concrete economic world beyond their own heads.
The hit on capitalism has long been that it would destroy itself from the bottom up, as oppressed have-nots revolted against the system. But the Greek drama suggests a different possibility: that capitalism will destroy itself from the top down, as rampant inequality and imbalances in power leave those in charge free to treat the world like their own personal game of SimCity.