Heated exchanges, flagrant mistakes, results ranging from mediocre to dismal, and ultimately, a divorce on the horizon. There is no doubt that the troika’s days are numbered, according to a dozen sources consulted about that complex entity comprising the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB), in charge of bailing out countries struck down by the euro crisis.
“Death to the troika,” said one high-ranking European official in Brussels after examining the plights of countries such as Greece and Cyprus, which are headed for a depression, and to a lesser extent Portugal and Ireland, which are facing a long desert crossing. The IMF has been quite clear about its plans to exit the troika sometime in the future, and the European Commission is already counting the days.
“The conditions are more than sufficient, if governments so wish, for European institutions to take full responsibility for the bailouts,” Commission President José Manuel Durão Barroso has said.
The marriage between Europe and the IMF is practically in tatters, perhaps because there was never any real love to begin with. Back in 2010, when Greece was staring down at the abyss, the European Commission presented member states with the outline of a European Monetary Fund that would be in charge of handling the bailouts. Germany shot down the project point blank. It did not trust the Commission and its lack of experience managing bailouts, and it feared politicization. Neither the Commission nor the ECB wanted the international organization on board, but Brussels ended up accepting the idea because it had no choice.
The time has come to share responsibility for the damage, and the blame game has begun in earnest
For a while, the troika suffered from utopian thought: it blandished scores of academic studies that ended up not being quite as scientific as they were purported to be, or which were overly relied on. And when it became evident that the medicine — in other words, the spending cuts — was not working, the troika argued that the dosage was too low and that the doctor had been too benevolent.
These days, not even the troika believes this story anymore. Instead, the time has come to share responsibility for the damage done, and the blame game has begun in earnest. But the cross-accusations could have a boomerang effect: the European Parliament is considering whether to create investigative committees to look into the fiasco.
The problems were there from day one. The ECB was always somewhat absent, too busy obsessing about not losing a single euro. Brussels and Washington now blame it (behind closed doors) of selfishness and lack of commitment, “which can only get worse due to incompatibility problems when it becomes the single banking supervisor,” says Jakob Kirkegaard, of the Peterson Institute.
Meanwhile, the IMF has intoned a mea culpa over the Greek débâcle that sounds curiously like an attack against the Commission. Essentially, the Fund says it is impossible to deal with such a myriad of prime ministers, finance ministers, commissioners, Eurogroup workers and ECB hawks: there is a cacophony of voices and decision-making is disastrous. The IMF also noted that the Greek adjustment was based on unreal hypotheses (the country was supposed to leave recession behind in 2012; instead, the economy will contract over four percent this year) and that essential steps were not taken, such as debt restructuring, a move that Europeans strongly rejected.
“And they continue to reject it, because that is Europe’s problem: it is still in denial over Greece, which cannot come out of the hole without that kind of haircut, and over Portugal and Ireland, which need another push and maybe something more in the Portuguese case, and certainly in Cyprus, which is headed for disaster,” say sources close to the IMF.
Europe is still in denial over Greece, which cannot come out of the hole without a haircut"
The Commission went ballistic after being chewed out by the international organization. Brussels said the Washington-based agency is being disloyal and blaming this attitude on the growing role of emerging economies: China, Brazil and other nations are upset at the risks being taken to bail out Europe, a wealthy continent (Ireland’s per capita income ranks fourth in the EU, higher than Germany and significantly above Brazil). European Commissioner Olli Rehn has accused the Fund of “washing its hands” after being there for all the decision-making. At the same time, he insists that the programs are headed in the right direction. At least that is what he says in public; in private, European sources consulted for this story admitted that the Greek bailout is “not working” and forecast a debt-restructuring scheme of the sort advocated by the IMF. These same sources say there are serious question marks regarding the efficiency of the Portuguese and Irish bailouts, not to mention the case of Cyprus, a poster child for everything that is wrong with the euro crisis management.
And so the troika is condemned to die a slow death: the IMF contributed a third of the Greek bailout, but only 10 percent of Cyprus’s. But the main thing is that the formula appears to have run its course. “One would at least expect the bailouts to shorten the labor pains and shrink the scarring left by the crisis. But the exact opposite is happening,” says a high-ranking EU source.
Not everyone is so critical, though. In Luxembourg, one top official at a European institution partially defended the bailouts. “We need to consider what would have happened without those programs: a collapse of those economies. Besides, without the IMF the bailouts would not have been very different. What’s happened is logical: three strong personalities, unaccustomed to sharing power, have had their inevitable confrontations. But designing the adjustment was difficult: to compensate for the cuts, there was no stimulus in Germany and no devaluation. That’s as much as can be blamed on the troika, including the IMF: that it was only able to impose adjustments on the bailed-out countries, when the problem affects the entire euro zone, including Berlin and Frankfurt.”
But the world of academia is less indulgent. “The troika is uncomfortable for the IMF and for Europe. The Fund is criticizing the EU over its refusal to restructure unsustainable debt levels, its failure to recapitalize banks, and its insistence on austerity. And Europeans are criticizing the Fund over lack of loyalty. So the logical thing now is for each one to go their separate ways. This is no guarantee of success: if Europe remains in denial over the banking sector or the need for debt restructuring, and especially if it remains stuck in this absurd austerity and reforms race without Germany or the ECB compensating for it in some way, then disaster is certain,” says Barry Eichengreen, a professor of economics at UC Berkeley.
Over on this side of the Atlantic, the D-word is used as well. “The troika is a disaster,” states Charles Wyplosz, of the Geneva-based Graduate Institute. The IMF should not have agreed to join, but once inside, excuses are superfluous, he says, adding that the programs were designed to protect countries that are doing well, not to save the bailed-out ones. “And in general there will be no solution until creditors reach a deal with the debtors: we need to end this restructuring taboo. Otherwise, it’s like prescribing large doses of aspirin when what’s required is surgery.”
But perhaps the harshest criticism comes from Paul De Grauwe, of the London School of Economics, who described the troika as “a tremendous mistake in form and content.”
The troika, he says, has orchestrated a recession across Europe with those programs based on austerity but without any caveats for creditor countries like Germany, who should be doing a lot more. “The trouble is, killing the troika is not the solution: the austerity fundamentalists are thick on the ground in European institutions.”