The IMF has learned the hard way that if imposing hard line economic policies on a borrower has too high of a social cost, the policy ultimately has negative repercussions.
These repercussions could result in a political backlash, as is the case in Greece, or lead to a situation such as that in Indonesia in 1998, when an overly austere IMF package led to riots.
Furthermore, the aftermath of the Asian crisis of the late 1990s saw emerging countries piling up foreign exchange reserves and investing them all in US treasury bonds. This savings glut led to the low-interest-rate environment that pushed banks and investors to look to subprime securitisations for some extra yield, with calamitous results.
In the Greece versus Germany stand off that is currently playing out, there is a risk of ending up in the same negative territory. A Grexit from the eurozone will be a disaster for both sides – Greece will go into meltdown and markets will start betting against the next likely casualty, while yields on Italian and Spanish bonds will spike, cancelling out the impact of the European Central Bank’s belated quantitative easing programme.
While the failings of Greece as a country are well known – tax evasion, overgenerous public pensions, bloated bureaucracy, underperforming state-run companies – Germany forgets that it too signed up to a eurozone structure that is flawed from top to bottom. Surely it has to take responsibility for those errors as much as Greece needs to prove that it is worthy of eurozone membership.
The fact is that few eurozone countries can claim an unblemished record on meeting the Maastricht criteria, Germany and France included. The rules have been bent whenever it has been convenient, and Germany and the European Commission have been complicit in this.
I confess to never having read the acquis communautaire – the legal framework for a country to gain EU admission – but on the evidence shown, the basic rule of law, the operation of free markets and institutional credibility are sadly lacking in many EU member states. In Greece’s case, it is doubtful whether it should have been admitted to the EU never mind the eurozone.
But why were Germany and the European Commission so anxious to enlarge? Because Germany has been the main beneficiary up to now of the eurozone – allowing it to export cars and capital goods to the peripheral countries made affordable by their adoption of a quasi mark instead of a discredited drachma or escudo. At a stroke they inherited the Bundesbank’s hard-won reputation for monetary probity without having done a thing to earn it.
It is true also that the peripheral countries chose not emulate Germany in carrying out the equivalent of former Gerhard Schroder’s Agenda 2010 reforms to make their countries more competitive. Instead they rode their economies on the back of a powerful currency, borrowed at record and inappropriately low yields, sucked in imports and stoked up a property boom. In this they were helped by the failure of the ECB to raise interest rates because it preferred to keep them at rates more relevant to economic conditions in France and Germany.
As many analysts have pointed out, running a German-style current account surplus requires someone else to have a peripheral style current account deficit. What’s more, the creditors to the periphery – formerly German or northern European banks; now in the case of Greece after the bail out, governments and multilaterals – have to take some responsibility for making bad lending decisions. They lent money to the peripheral countries at rates that had not the remotest relationship to the credit risk involved.
Now is a time for statesmanship not brinkmanship in Europe. If Germany wants the eurozone crisis resolved it will have to accept that it also signed up to this sad state of affairs and share responsibility for the outcome. Or it can carry on down the road of the IMF in the 1990s and witness more riots and the rise of extremist political parties.
Brian Caplen is the editor of The Banker.
