The IMF Still Misunderstands the Euro Crisis

WASHINGTON, DC – In July, the International Monetary Fund’s Independent Evaluation Office released a major report on how the Fund handled the euro crisis after 2010. The IEO report is critical of Fund behavior; but, as with previous IMF self-evaluations, it misses many substantive issues.

Specifically, the IEO argues that the Fund was captive to European interests – hardly surprising, given that Europeans constitute one-third of the Fund’s executive board. Moreover, the Fund was mistaken in assuming that “Europe is different,” and that “sudden stops could not happen within the euro area.”

In a financial crisis, authorities must act fast to address the problems that caused it and restore confidence. The United States government did just that in the fall of 2008; European leaders, meanwhile, dithered – a point the IEO neglects to mention.

The IEO report also doesn’t assess IMF programs’ effectiveness. Consider Greece, where the Fund’s response was clearly insufficient. In 2009, the Greek budget deficit was 15% of GDP; with an IMF program, the deficit fell in 2010, but only to 11% of GDP. Meanwhile, the three Baltic countries – Estonia, Latvia, and Lithuania – carried out budget tightening of 9% of GDP in 2009.