Tough home truths in IMF report

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

The International Monetary Fund (IMF) ''does not mince its words'' in calling on the eurozone countries to transform their economies, slash public spending and pursue economic governance in its recent report on the eurozone crisis, writes Michael Berendt, formerly senior policy adviser at Fleishman-Hillard, in a June blog post.

The following contribution was posted on Blogactiv.eu by Michael Berendt.

''It was evident from the beginning of the eurozone crisis that the only way to discipline recalcitrant member states in the face of enormous budget deficits was to involve the International Monetary Fund, an independent, external organisation which was definitely not part of the family, a body which could lay down tough conditions for winning its support, and could pull the rug out if necessary.

So it was little surprise to see the forthright tone of the IMF team when they left Luxembourg on 7 June, having completed their analysis of the situation. Their report makes quite a contrast to the gentle reassurances of the eurozone ministers at their meeting on the same day.

The IMF report doesn't mince its words. It may be familiar language for failing economies in Latin America, but for the euro zone?! Take a few phrases: 'Policies need to move urgently from crisis management to fundamental reforms', 'strengthen economic governance of EMU', 'long-standing problem of anaemic growth in the euro area must now be addressed', 'the euro area fiscal framework needs to be substantially strengthened', 'more ambitious changes are needed'. And so on, with detail. The fundamental theme is that European countries must transform their economies, slash government spending and drive for economic growth.

The eurozone ministers did formally launch the €440bn European Financial Stability Facility at their own 7 June meeting, but that's definitely 'crisis management'. The EFSF has been established as a limited company under Luxembourg law and will work in conjunction with the IMF to guarantee support for eurozone members if their credit position should weaken.

The question still remains as to what the euro zone can do to strengthen its effectiveness and meet at least some of those IMF demands. An intriguing game of smoke and mirrors has been played out since the Special Purpose Vehicle and the associated IMF support were announced on 9 May, with the main aim of convincing the markets that Europe is getting a grip on its profound economic crisis. The reality is that everyone has a different idea of what needs to be done and what can be done in the longer term.

Economic government for the euro zone. That's the catchphrase. President Van Rompuy has used it, French Economy Minister Christine Lagarde has used it and Chancellor Angela Merkel has almost used it – 'economic governance' is the closest she has come (a phrase also used by the IMF). President Sarkozy has spoken of a Eurozone Council. But a closer look at how it would work reveals something like a beefed-up version of what already exists.

The argument that a European single currency can only survive if there exists a common economic policy, common fiscal policy and common budget policy may prove to be correct in the long run, but it is clear that this is not what Europe's present leaders mean when they talk of economic government.

France wants a formal decision-making structure where heads of state and government agree on fiscal discipline and maybe impose sanctions on recalcitrant member countries. Germany in effect argues for a stronger commitment to the Stability and Growth Pact (and has announced budget cuts of €30bn over the next four years to play its part). Luxembourg Prime Minister Jean-Claude Juncker, president of the eurozone group of countries, believes that eurozone governments should vet each other's budget plans. But nobody contemplates the transfer of fundamental tools of economic management to a supranational European policymaker. Maybe the IMF is a different matter?

So what of the euro crisis? At least the declining euro is seen as a positive, making European goods more competitive and – perhaps – boosting domestic demand within the crucial German economy. What is also evident is an increased determination to cut government spending sooner rather than later, reflected in the G-20 meeting. And of course these are not challenges faced only by the euro zone: the UK's new coalition government has a massive challenge ahead in reducing spending and boosting growth. A poisoned chalice indeed!''

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