Wednesday

31st Aug 2016

Analysis

Democracy is the real victim in the Greek tragedy

The IMF staff report leaked last Wednesday (5 June) evening was a guided missile aimed at the European Commission.

Contained in the Fund's 50-page mea culpa were two accusations levelled at the EU's executive arm: that it blocked an early, and much needed, restructuring of Greece's debts and that it sat on its hands while the Greek economy collapsed. Neither charge should come as a surprise.

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  • The IMF report on Greece raises big questions about the Troika's accountability (Photo: asterix611)

The commission's response was a well executed, if utterly brazen, piece of political spin.

Olli Rehn's spokesman, Simon O'Connor, played down the importance of the report implying that it was the work of a handful of staffers and did not represent the official view of the IMF. He also rejected as "plainly wrong and unfounded" the report's suggestion that the commission had done little to help the Greek economy.

The following day, economic affairs commissioner Rehn himself accused the IMF of throwing "dirty water." He then briefed reporters that the IMF's managing director Dominique Strauss-Kahn did not propose early debt restructuring, and that his successor Christine Lagarde was opposed to it.

But for all their protestations, much of the criticism heaped on the commission is valid.

The EU executive knows that it is vulnerable to the charge that it has been more interested in spending cuts and tax rises than in creating the conditions for economic recovery in the eurozone's crisis countries.

A calculated decision

Meanwhile, the decision to delay the restructuring of Greece's debt until February 2012 - nearly two years after the first eurozone bailout fund, the European Financial Stability Facility (EFSF), was set up - was a calculated political decision.

Numerous reputable economists (including several Nobel prize winners) looked at Greece's debt payments, the 5.5 percent interest rate attached to the loans in the first bailout package, and the depth of the country's recession, and concluded that anything short of a 50 percent write-down of Greece's debt pile was unsustainable.

After the creation of the EFSF, the eurozone's delaying tactics were not about avoiding contagion but instead giving EU banks more time to get their money out of the eurozone periphery.

Data published by the Bank of International Settlements indicates that, in Germany's case, an estimated $353 billion (€270 billion) left the five crisis countries - Greece, Ireland, Portugal, Italy and Spain - in 2010 and 2011.

As the IMF report admits, "the delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook."

It also greatly increased the cost of the Greek bailout to taxpayers not just in Greece but across the EU. But it is harsh to lay the blame for failing to agree a credible restructuring of Greece's debt at the commission's door. The main roadblocks were in Berlin.

End of the Troika?

If nothing else, the IMF report has hit a raw nerve and will inevitably have implications for the working relationship of the three institutions involved in the bailouts - the commission, the European Central Bank and the IMF (known as the Troika) - in the future.

It is quite possible that the IMF will even leave the Troika altogether. The commission will publish its own report evaluating the Greek programme later this year. The two main lessons from a policy perspective must be that upfront debt restructuring is preferable to forcing a country to maintain interest payments on debts it can never repay, and that front-loaded austerity programmes will inevitably lead to a deep and prolonged recession.

But while the commission and the IMF squabble over who was responsible for the failures, and limited successes of the policies chosen for Greece, one point is increasingly coming to the fore. Namely, that three years after it was created to handle the Greek bailout, the Troika, which now handles all four of the eurozone's bailout programmes, is not democratically accountable.

It has much to answer for but nobody to answer to.

The first step demanded by Sharon Bowles, who chairs the European Parliament's economic affairs committee, is for the IMF members of the Troika to appear in public hearings with MEPs.

"The Troika will also need to become more democratically accountable, above all else to the European Parliament, she said recently, adding that "it is not possible that decisions which strike at the very heart of a country continue to be taken without the proper level of accountability."

However, if the democratic controls over the Troika are non-existent, they are scarcely any stronger when it comes to the role of the commission.

Sure, Olli Rehn has received the occasional verbal lambasting from MEPs on the Economic and Monetary Affairs committee. For that matter, so has Dutch finance minister Jeroen Djisselbloem, whose uncertain start as chair of the Eurogroup was marked by the chaotic and botched bailout for Cyprus. Both appear regularly at 'economic dialogue' hearings with MEPs. But the capacity for MEPs, or national parliamentarians, to change or influence decisions is very small - Parliaments can bark but they have no teeth.

In fact, short of sacking the entire Barroso Commission - which all bar the commission's bitterest critics would concede was overkill - there is not much the Parliament can do.

Power without accountability

National parliaments are also toothless. Their role in each of the bailout packages has been to put the Troika's demands, stitched up behind closed doors, into law. As was demonstrated when the Cypriot parliament rejected the Troika's first bailout offer in April, there is no capacity to broker a compromise on the terms.

This lack of basic democratic controls also makes it harder for countries to take national 'ownership' of their recovery programmes.

The EU's new economic governance framework, particularly the so-called 'six pack' and 'two pack', has handed sweeping powers over national budgetary policy to the commission. With the right to make binding recommendations on how member states run their economies together with automatic sanctions for those who fail to correct their debts and deficits, commissioner Rehn has the powers of a minister for the eurozone without the democratic overhead.

Democracy rests on electorates being able to hire and fire the politicians who govern them. Since 2009, all but a handful of EU governments have been toppled, many as a direct result of their handling of the sovereign debt crisis. But those wielding the real power over economic policy-making in Europe - the three members of the Troika - remain largely unaccountable and unchallenged.

A report as damning as the IMF paper would have serious consequences in most (if not all) European countries for the government and, in particular, the ministers involved. The minister responsible would be hauled before parliament and censured. Many would be sacked or forced to resign. Nobody in the Troika is in danger of facing this.

Whether or not the commission cares to admit it, the truth is that serious and avoidable errors were made by the Troika at every stage of the Greek debt crisis. What is most troubling is that there is nothing to stop these mistakes from being repeated.

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