The Economic Consequences of Greece

TILTON – The first sentence of the 1957 Treaty of Rome – the founding document of what would eventually become the European Union – calls for “an ever-closer union among the peoples of Europe." Recently, however, that ideal has come under threat, undermined by its own political elite, which adopted a common currency while entirely neglecting the underlying fault lines.

Today, those cracks have been exposed – and widened – by the seemingly never-ending Greek crisis. And nowhere are they more evident than in Greece's relationship with the International Monetary Fund.

When the euro crisis erupted in 2010, European officials realized that they lacked the necessary expertise to manage the threat of sovereign defaults and the potential breakup of the monetary union. For EU officials, avoiding the eurozone's collapse became the top political imperative, so they turned to the IMF for help. The irregularities in the Fund's resulting intervention attest to how serious the eurozone's problems were – and continue to be.

For starters, the IMF's Articles of Agreement require it to interact only with entities that are fully accountable for the help received: a member country's “treasury, central bank, stabilization fund, or other similar fiscal agency." But the institutions with which the IMF is dealing in the eurozone are no longer responsible for their country's macroeconomic management; that power lies with the European Central Bank. In lending to Greece, it is as if the Fund had lent to a sub-national unit, such as a provincial or city government, without insisting on repayment guarantees from the national authorities.