EU-IMF Assistance to Euro-Area Countries: an Early Assessment
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EU-IMF assistance to euro-area countries: an early assessment Jean Pisani-Ferry, André Sapir and Guntram Wolff May 2013 [Review copy of a manuscript of a forthcoming Bruegel Blueprint] 1 Contents Preface ............................................................................................................................... 3 Executive summary ........................................................................................................... 4 1. Introduction ................................................................................................................... 7 2. What is special about the crisis in the euro area? .......................................................... 9 3. The Troika ................................................................................................................... 19 4. The euro-area programmes in perspective: a comparison with earlier IMF programmes ......................................................................................................................................... 25 5. Assessing the three euro-area programmes ................................................................. 34 6. Assessing the institutional set-up of assistance ........................................................... 82 7. Conclusion and recommendations .............................................................................. 92 References ....................................................................................................................... 98 Appendix 1: Derivation of the financing needs of the three countries .......................... 102 Appendix 2: Methodology for Table 6 .......................................................................... 103 Annex 1: Framework for cooperation between the IMF, the European Commission and the ECB ............................................................................................................................... 106 Annex 2: Timeline of events ......................................................................................... 107 2 Preface In 2011, the International Monetary Fund (IMF) asked us to prepare an independent assessment of its surveillance of the euro area during 2007-09. The resulting report (Pisani- Ferry, Sapir and Wolff, 2011) was published by both Bruegel and the Fund. Having studied crisis prevention, we thought that it would be particularly interesting to continue with a further study of the results of, and lessons from, crisis management. It is an early assessment for sure, as all three countries covered (Greece, Ireland and Portugal) were still subject to financial assistance programmes at the time of writing. Yet it is necessary: three years after the first Greek programme started, in spring 2010, policymakers and citizens deserve to be offered a comprehensive and systematic evaluation of what has been achieved, and what has not. This evaluation was carried out independently by Bruegel without having been commissioned. We benefitted from many discussions with Troika members, and with policymakers and experts from crisis countries; we also benefitted from feedback on an early draft on the occasion of a workshop held in Brussels on 26 March 2013, and from detailed comments on a later draft, for which we are indebted to all those who commented. A preliminary version of the study was presented on 22 April 2013 at the Peterson Institute of International Economics (PIIE) in Washington DC and benefitted from input from Jörg Asmussen of the European Central Bank, Servaas Deroose of the European Commission, Reza Moghadam of the IMF and Jacob Kirkegaard of PIIE. We did not get access to any confidential documents. In particular, the data presented in this study is all from public sources. We are grateful to all those who helped us decipher the intricacies of the Troika programmes and improve our assessment. We would also like to thank Adrian Bosshard, Hannah Lichtenberg and Carlos de Sousa for their very effective assistance in the preparation of this report. The authors bear sole responsibility for any remaining errors, and for the views expressed in this report. Jean Pisani-Ferry, André Sapir, Guntram Wolff May 2013 3 Executive summary Three years ago, in May 2010, Greece became the first euro-area country to receive financial assistance from the European Union and the International Monetary Fund in exchange for implementing an economic programme designed by the Troika of the European Commission, the European Central Bank and the IMF. Within a year, Ireland and Portugal went down the same path. This study is intended to provide an early evaluation of these assistance programmes implemented by the Troika in these three countries (Cyprus and Spain are not included in this assessment because the programmes are too recent). The study assesses the economic impact of the programmes and the consequences of their particular institutional set-up. The Troika is a unique institutional construction that involves an unprecedented degree of cooperation between regional and global financial institutions. Such an assessment is made difficult by two factors. First, at the time of writing, all three programmes were still on-going, including in Greece where a second programme was started in March 2012. Second, the circumstances are clearly unique, not only because the three countries are developed economies, but also because they belong to a monetary union and because the programmes were implemented at a time when both the euro area and the global economy were going through a severe financial crisis. The three Troika programmes stand out compared to typical IMF programmes because of their exceptionally long durations and the exceptionally large size of the financial assistance packages. One reason for this is that the build-up of imbalances in all three economies at the start of the programme was much more significant than in typical programme countries. Another one is that, unlike many IMF programmes, official assistance entirely substituted markets in the financing of sovereign borrowing needs. Economic and social hardship remains severe in all three countries. However, assessment cannot stop there and has to be based on a comparison between reasoned expectations and outcomes. Against this yardstick, the programmes have so far been successful though subject to risks in one of the three countries – Ireland, which at the time of writing is on track to exit the three-year programme and regain access to financial markets; potentially successful in Portugal, even though the economy remains structurally weak and the situation remains fragile to shocks; and unsuccessful in Greece, which is on a totally different trajectory to the other two countries. In Greece, early assumptions by the Troika about the ability of the economy to adjust and of the Greek political-administrative system to implement programme measures proved unrealistic. The subsequent European debate on Greek exit from the euro area further hindered progress in Greece. By contrast, the Irish and Portuguese programmes were based on more realistic assumptions, and implementation of programme conditionality was much better. A more subtle conclusion is that the programmes have been successful in some ways and unsuccessful in others. The main success has been the current account, with deficits shrinking much faster than expected, although, depending on the country concerned, the reasons for this are either encouraging (an improvement in exports) or discouraging (a collapse of imports because of the recession). 4 The three countries have by and large adopted the austerity measures prescribed to them by the Troika. In structural terms they all implemented significant consolidation efforts. They had little choice since lender countries were unwilling to provide more financing. The alternative to austerity would have been debt restructuring. In the Greek case, earlier restructuring would have been preferable, at least from a Greek point of view. In the Irish case, the bail-in of senior bank bondholders might have been desirable from the Irish point of view. But it would have improved the programme’s sustainability far less than in Greece, and it could have had significant negative implications for the funding of Irish banks. In the absence of expansionary measures elsewhere in the euro area, austerity measures in programme countries, the loss of confidence in the euro and the fragmentation of the euro financial system severely depressed growth. The recession was deeper or much deeper than anticipated. Together with the collapse of labour-intensive sectors such as construction, this also implied that unemployment increased far more than anticipated. This risks jeopardising the sustainability of the countries’ necessary adjustment. Compared to earlier IMF programmes, the drop in GDP and the slow adjustment in the real exchange rate in the three euro-area countries were exceptional. Also, unemployment increased much more dramatically. Moreover, the Greek debt restructuring was the largest in history. Turning to institutional matters, EU-IMF cooperation clearly played an important role in the design, monitoring and, ultimately, the implementation of the programmes. Though fraught with many potential problems, EU-IMF cooperation to deal with the crisis was inevitable in euro-area countries. From the EU side, despite various political misgivings, recourse to the IMF was necessary because the EU lacked expertise on, and experience of, crisis