Not since 1976, when Britain, finding no other means of coping with a severe financial crisis, succumbed to the requirements of the International Monetary Fund, and made deep cuts in public expenditure in exchange for massive assistance, has there been so much controversy about the IMF on the European continent as that surrounding Greece’s capitulation to the Fund last week. The acceptance of the IMF’s requirements by then British Prime Minister Callaghan led to his Labour Party’s loss of power in 1979 and an extended period of rule by Prime Minister Margaret Thatcher.
Only a year and a half or so ago, the Government of Iceland, a country of just 300,000, but known for its competence and technological innovation, and with a relatively high per capita income, went through a process of anguish and temporary resistance not dissimilar from that of Britain, before similarly succumbing, reaching out to the IMF and asking to join the European Union, something that it had previously thought not necessary for its dynamic economy. The Icelandic Minister of Industry, in requesting a loan from the Fund, eventually felt it necessary to observe to the country’s citizens that, “I have now come to the conclusion if we call for help from the IMF, other central banks, other countries, will want to take part in the aid process.”
That, of course, after much resistance and hesitation, is what the Greek socialist government of George Papandreou, elected only a little over six months ago, has itself also painfully discovered. And it reflects an experience which so many countries in the developing world, including in the Caribbean, had themselves been discovering since the end of the 1970s when Jamaica, after much domestic controversy, found itself going to the Fund. And now, to return to Europe, much discussion is taking place as to whether Portugal and Spain may well find themselves going the same way.
After the 1970s British experience, the country underwent an experiment in economic and financial liberalization under Margaret Thatcher which (as was simultaneously occurring in the United States under Reagan) that opened a period of economic growth and domestic prosperity. So successful did that experiment seem to be that it was adopted by the successor Labour administration of Tony Blair on its own assumption of office, allowing the then Chancellor Gordon Brown to boast that Britain had overcome the persistent period of boom and bust that had hitherto characterized the country’s economy. Of course, the recent Western world’s financial, and then economic, crisis has forced now Prime Minister Brown to eat his words, and he, like Callaghan, now appears to be facing electoral defeat.
During that period between the mid-1980s and mid-2000, the tendency in the Western world, including the European states, was to suggest that recourse to the IMF was no longer a necessary part of their economic policymaking. So, as the East Asian states in 1997 and after, succumbed to financial difficulties and were forced to have recourse to the IMF, their experience was taken as something now unique to non-Western, developing countries. Where the East and Central European states, released from the Soviet sphere and incorporated gradually into the European Union’s sphere, faced economic difficulties, these were treated as merely a preliminary to their acceptance of policies of structural adjustment and liberalization similar to those of the Thatcher-Reagan kind, now also fully accepted by the IMF as the way to go. And these states were more or less assured of funding from the so-called structural and cohesion funds of the EU once they followed the appropriate policies, as previously had Spain and Ireland in particular, ostensibly successfully.
So when the East Asian states (Indonesia, Thailand in particular), hitherto the ‘Asian tigers,’ had to succumb to the IMF’s policies after 1997, the Western powers, following many Western academic economists, were quick to advise that they take recourse to IMF support, contingent on their accepting the advice of the Fund’s advisors and further liberalise their economies. Few observers will forget the graphic picture, relayed around the world, of the then IMF President, standing with hands folded and a most serious face, looking down over a seated President Suharto of Indonesia, as he signed and subscribed to the requisite IMF agreement.
Now, as the Asian Tigers have resumed their rapid economic growth strides, even in the midst of the so-called global recession, the wheel has come full circle again, with European states having, however reluctantly, to face the strictures of the IMF. Some like Ireland, once perceived as a European tiger, have decided to take the plunge and impose the necessary austerity measures; others, like Iceland more recently, have resisted, but have come to realize that their receipt of substantial assistance from other sources in Europe was dependent on subscribing to the IMF’s terms; and still others, as with Papandreou in Greece today have slowly but surely been constrained to bow their heads, and agree to all the IMF’s terms as a prerequisite to the EU and in particular Germany’s agreement to the further transfer of funds from the European Monetary system. Still others, like Spain, are slowly coming to the same conclusion.
The German response to the Greek request for funds has had two aspects to it, one domestic and the other regional, that bear noting. First, the government of Angela Merkel has become very sensitive to the fact that, as the largest economy in the monetary union, it has had to bear a substantial part of the burden of grants of funds to the former east and central European states as they have sought to de-communise their economies. The Germans, like other major European Union states, were always very conscious that the success of the economic liberalization of those states would serve German strategic interests. This has been so particularly in respect of that success being a magnet to the states that were formerly directly part of the Soviet Union, similarly inducing them to follow the liberalization economic strategies of the West, but with sufficient Western aid to inhibit them from experiencing the economic free-fall which Russia went through as a consequence of what the Germans would consider Yeltsin’s faulty liberalization policies. But a consequence for Germany, as the recession has hit that country itself, has been a degree of popular resistance to German external assistance, as evidenced now in Mrs Merkel’s fear of a backlash against her coalition in a coming German state election.
The second, a regional or external aspect of the German response, is that it has sought to link her own assistance to a strategy which would make delinquent countries indicate clear acceptance of the IMF’s policies before they could receive assistance from the Eurozone monetary system. This has led to much controversy and criticism of Merkel’s policy, especially as this is seen by other Europeans as being linked to her domestic electoral strategy.
For Merkel has insisted that the people of Germany, and indeed the EU, must clearly see Greece’s socialist government’s full subscription to policies aimed at reducing the size of the public sector, including what are seen as excessive social policies in relation to public sector employees. And her insistence has placed in doubt a declaration made as long ago as mid-February, that they would “take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole.”
So the result of the German hesitation has been to cast a cloud over the extent of the Eurozone system as a viable underpinning mechanism, suggesting fears that the monetary integration system of which the leading EU member-states have been so proud, is more feeble that might have been thought. Controversies have revived, echoes of which we have sometimes heard in our own region, as to whether a monetary integration system or union can stand on its own; or whether on the other hand, the linkage between economic policy and monetary policy is such that for a monetary union to be viable, there must be political integration – political union – in Europe.
That discussion will certainly go on. But its relevance will in no small part be determined by the extent to which the combined cooperation between the European Central Bank and the IMF are able to nurse a somewhat hesitant Greek government to persuade its population to accept the effective implementation of the extensive measures to which it has now agreed.
And here in our region the OECS countries, now utilizing their own integrated Eastern Caribbean Central Bank to induce weakened countries to implement the IMF’s policies, while assisting them to take wider regional protective action in the face of the Stanford-Clico affairs, will be watching the European experiment with interest.
