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30/09/2016

Commission and IMF clash over influence of politics over bailout programmes

Euro & Finance

Commission and IMF clash over influence of politics over bailout programmes

IMF Managing Director, Christine Lagarde, ruled out the need to develop new procedures to avoid political interference.

[German Chancellery]

The European Commission has said that stabilising the eurozone was “eminently a political issue” after an independent probe into the IMF’s handing of sovereign bailouts found it was vulnerable to pressure from governments.

Since the IMF was called to bail out eurozone economies in 2010, its involvement has not been without controversy.

Tensions between the IMF and EU reached critical levels in June 2013, when the IMF accused the bloc of lacking the experience and skills to manage bailout programmes.

In the 28 July report, the IMF’s Independent Evaluation Office said that “at the euro area level, IMF staff’s position was often too close to the official line of European officials, and the IMF lost effectiveness as an independent assessor”.

Internal auditor hits out at IMF handling of Greece bailout

An independent probe into the IMF’s handling of European bailouts found that it bent its rules and was vulnerable to political pressure as it embarked on the ill-fated 2010 Greece rescue.

The International Monetary Fund’s Independent Evaluation Office (IEO) said in its report on Thursday (28 July) that in the plunge into the eurozone crisis, the …

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In order to regain some independence and strengthen its position vis-à-vis the EU, the watchdog recommended developing “procedures to minimise the room for political intervention” in the IMF’s technical analysis.

“The credibility of the IMF comes from the technical competence and independence of its staff, and the managing director must ensure that its technical work is protected from political influence,” the IMF’s internal auditors said.

The European Commission on Friday (29 July) noted not only the strong links between technical experts and politicians in the crisis years but also highlighted the influence of politics on the bailout discussions.

“A programme for stabilising the euro area, as well as for stabilising Greece in particular, is far from a purely technical issue. It is certainly and eminently political issue,” Commission spokesperson Annika Breidthardt said.

She recalled that the bailout plans were discussed both at technical and, at the same time, at political level, as the eurozone finance ministers (the Eurogroup) and the EU leaders took the major decisions after getting input from the IMF, the Commission and the European Central Bank experts (the Troika).

Criticism

The EU and IMF’s rescue programmes in Greece, Ireland, Portugal, Spain and Cyprus have been criticised by various parties over the last years.

Parliament slams Troika, calls for a 'European Monetary Fund'

The European Parliament backed two resolutions on Thursday (13 March) criticising the lack of democratic accountability of the 'Troika' of international lenders, calling for the creation of a European Monetary Fund to assist over-indebted countries.

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In a report published in February 2014, the European Parliament said that the “preliminary inconsistency of goals” between the IMF (internal devaluation) and the Commission (fiscal consolidation) depressed the rescued economies.

The poor policy mix was the result of the political discussions held in the Eurogroup, MEPs said.

Early this year, the EU Court of Auditors concluded that the design of the programmes was “generally weak”.

Auditors accuse Commission of flawed bailout programmes

The European Commission’s handling of bailouts for countries hit by the financial crisis was “generally weak” and inconsistent, the European Union’s Court of Auditors (ECA) said on Tuesday (26 January).

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The auditors recommended the Commission and the ECB set “procedures for the quality review of programme management and content” and “formalise inter-institutional cooperation with other programme partners” such as the IMF.

The Commission said back then that it would take the recommendations “very seriously”, and consider further changes on top of those already made.

Positions

The IMF’s Managing Director, Christine Lagarde, reacted to the recommendation to prevent political interference by saying that “I do not accept the premise of the recommendation, which the Internal Evaluation Office failed to establish in its report, and thus do not see the need to develop new procedures”.

Background

The financial crisis hit the European Union in 2008, starting with non-euro zone countries like Hungary, Romania and Latvia which received EU help from the Commission's balance of payments facility. This facility was eventually raised to €50 billion.

For eurozone countries, such as Ireland and Portugal, the Commission had €60 billion in the European Financial Stability Mechanism (EFSM) , which was all but exhausted in these two bailouts.

Eurozone governments provided an additional €440 billion in their European Financial Stability Facility (EFSF) bailout fund.

Further Reading