With much of the eurozone economy humming along nicely, and the sovereign debt crisis that engulfed the single currency region having largely receded, it is easy to forget that the country where it all started is still deep in trouble.
This week the enduring problem of Greece took a new and disturbing turn. It was revealed that the executive board of the International Monetary Fund is split on the question of what fiscal surplus Greece should be required to hit — which in itself will affect whether it needs official debt relief to reach sustainable growth.
Disputes between the IMF and the eurozone governments are hardly new but the fact that the fund admitted a division between its member countries is significant. European nations are over-represented on the board relative to their size in the global economy. Wielding that power to dissuade the fund from demanding debt relief from eurozone governments is a clear conflict of interest and poses a threat to the fund’s credibility and independence.
Over the past year, the stand-off between the creditors has been almost as rancorous as that between the creditors and the debtor. The fund, which over the years has come to take a more realistic view of Greece’s debt sustainability, has dug its heels in and said it will not continue to participate without further reductions in the burden. This leaves eurozone countries, particularly Germany, in a quandary. Berlin insists it will not continue with the rescue without the involvement of the IMF but it fiercely opposes the debt writedown that the fund is demanding.
The point at issue is the fiscal surplus Greece is required to hit. The IMF says that reaching and maintaining a primary surplus of 1.5 per cent of gross domestic product is sufficient; the eurozone wants an improbable 3.5 per cent. Given Greece’s repeated undershooting of growth targets, it is unlikely Athens can deliver the higher figure.
This dispute is familiar. But the IMF’s unusual decision to reveal a split on its executive board, which normally operates by consensus, underlines the weaknesses of the fund’s governance. The European directors on the board, who want the IMF to agree to the higher fiscal surplus number, are undoubtedly conflicted by having an eye on the effect on their own governments having to write down debt.
Forthcoming elections in the eurozone, including Germany and France, mean that the political as well as economic cost of being seen to give in to Greece is considerable. Greece’s own government has also been shaken by the conflict, and through its intransigence, the eurozone may force yet another change of administration, with the Syriza government being replaced by the centre-right opposition. At the margin, that may result in Greece being offered a slightly better deal than under the current administration. But short-term political manoeuvring is a terrible way to try to set Greece on a path to long-term debt sustainability and economic stability.
Right from the beginning of the Greek crisis in 2010, the political need to shield first their banks and investors, and then their taxpayers, has warped the response of eurozone governments. They have consistently signed up to hugely over-optimistic growth and surplus targets rather than accepting the need for more external finance and, if required, debt writedowns.
The rest of the IMF’s membership should be prepared to overrule the recalcitrant Europeans. The complaints of a self-interested cabal cannot be allowed to get in the way of Greece’s best interests. Eurozone governments have behaved poorly on this issue. They deserve to be defeated.