3. IMF and EMU before, during, and after the Eurozone crisis Flashcards
what are the 2 steps of the global context of the eurozone crisis
*Early 2000s = Era of Easy Money:
-Interest rates were low, especially in the US.
-Mortgages were easily accessible, even for high-risk borrowers (so-called subprime mortgages).
-These risky mortgages were bundled into complex financial products (like mortgage-backed securities), hiding the true level of risk.
*Mid-2000s = Turning Point:
-Interest rates started to rise (from 2004).
-Housing prices fell (from 2006).
-Borrowers defaulted on their loans, and financial institutions were left with worthless assets.
-Trust in the financial system collapsed, credit dried up, and many institutions faced insolvency.
what was the gov and IMF responses to the crisis
The crisis started in the US, but spread globally.
Governments and central banks intervened massively to stabilize the financial system.
Many governments couldn’t raise enough resources alone, so the IMF stepped in:
IMF lending surged in 2009 (after being very low before).
Central banks around the world also coordinated to contain the crisis.
impact of the crisis on the EU
EU was not spared. Reasons included:
Exposure of European banks to toxic US assets.
Loss of trust and drop in global demand.
Some countries had domestic vulnerabilities:
Housing bubbles.
High public debt and deficits.
Several new EU members needed IMF + EU + World Bank assistance:
Hungary (Oct 2008), Latvia (Dec 2008), Romania (May 2009).
critics of the EMU after the crisis
After the first wave, the crisis moved to Eurozone members:
High deficits and debt, and inability to borrow money on financial markets.
Examples:
Greece: Major bailouts in 2010, 2012, and 2015 due to hidden deficits and debt crisis.
Ireland: Housing crash, banking crisis, and bailout in 2010.
Portugal: Weak growth, high debt → bailout in 2011.
Spain: Housing bust and banking crisis → 2012 rescue for banks.
Cyprus: Oversized banking sector collapsed → 2013 bailout.
Italy: Almost required help in 2011 due to debt and market pressure.
IMF’s response to the crisis
The IMF did not foresee the crisis — but it responded rapidly and decisively.
Between 2008 and 2009, the volume of new IMF loans increased 73-fold.
The IMF introduced or improved several lending instruments:
Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL): for countries with sound fundamentals facing temporary liquidity problems.
New tools for emerging markets.
Reformed concessional loans for low-income countries.
New borrowing arrangements to expand available resources.
IMF reforms and new tools after the crisis
2008 Quota Reform: Ratified quickly to adjust voting shares (more say for emerging economies).
2010 Quota and Governance Reform: Adopted by IMF Board, but US only ratified it in 2015, showing its power to delay institutional change.
Introduction of new analytical tools:
Spillover Reports (since 2011): Assess global effects of national policies in major economies.
External Sector Reports (since 2012): Analyze countries’ external positions and imbalances.
after the crisis, the world attempted a broader global governance shift
G20 replaces G7/8 as the central forum for international economic coordination:
Reflects declining dominance of advanced economies.
Recognizes the growing role of emerging economies.
Push for ongoing IMF reform tied to this broader power shift.
Crisis accelerated movement away from the “Washington Consensus”:
Less emphasis on liberalization and austerity.
More attention to macro-relevant, context-specific policies.
what is the long term significance of the crisis for the IMF
The IMF proved resilient and adaptable in a time of crisis.
The crisis reshaped global economic governance:
More multipolar leadership (not just the US and EU).
Acknowledgement of emerging powers as key players.
However, the US still holds structural power, shown in its ability to delay reforms.
These developments suggest a gradual rebalancing of the international order, not caused by the crisis alone, but accelerated by it.
core pb of the EMU (the M)
EMU = Economic and Monetary Union, but only the Monetary part was fully realized.
One-size-fits-all monetary policy (single interest rate via ECB), but:
Not suitable for different economies (e.g., core vs periphery).
No country-specific adjustment tools like exchange rate devaluation.
ECB is independent and prohibited from directly financing states (Art. 123 TFEU)
role of the ECB during the crisis
Acted early to stabilize financial markets:
Cut interest rates quickly (3.75% → 1% between Oct 2008–May 2009).
Introduced “non-standard measures”: more liquidity, longer repayment terms.
Support to governments (indirectly):
2010: Started buying government bonds on secondary markets (Securities Markets Programme).
2012: Launched Outright Monetary Transactions (OMT) – but only for countries in an EU adjustment programme.
Draghi’s 2012 promise: “Whatever it takes to preserve the euro.”
ECB filled a governance gap, but was cautious and pushed for stronger fiscal mechanisms.
the soft “E” in EMU: weak eco governance
EMU lacked a common fiscal policy, and “no bailout” clause (Art. 125 TFEU):
Each member had its own budget.
No automatic help for struggling members (unlike EU non-EMU states like Hungary or Latvia).
Instead: Stability and Growth Pact (SGP) aimed at budget discipline:
Preventive arm: Reporting and goal setting.
Corrective arm: Excessive Deficit Procedure (triggered if deficit > 3% of GDP or debt > 60%).
But sanctions were never enforced pre-crisis.
Changes During the Crisis: From “No Bailout” to Emergency Lending
Ad hoc solutions evolved into permanent mechanisms:
May 2010: Greek Loan Facility.
May 2010: European Financial Stability Mechanism (EFSM) – backed by EU budget.
June 2010: European Financial Stability Facility (EFSF) – backed by member guarantees.
March 2011: Treaty change (Art. 136(3) TFEU) to allow permanent European Stability Mechanism (ESM):
Established in Oct. 2012.
Stepped in for Spain (2012) and Greece (2015).
Lending conditional on fiscal reform.
Pringle Case (CJEU, 2012): Confirmed legality under EU law if conditionality is respected.
reforms of the stability and the growth pact (SGP)
“Six Pack” (Dec. 2011):
Tighter budget surveillance, easier sanctions, new Macroeconomic Imbalances Procedure.
“European Semester”: Annual coordination of national budget cycles.
Fiscal Compact (Jan. 2013):
Legally binding balanced-budget rules in national law.
Not ratified by UK and Czech Republic (joined later).
“Two Pack” (May 2013):
Common budget timeline and rules.
Enhanced oversight for countries in trouble.
Eurobonds?
Idea of joint debt rejected during the crisis, especially by Germany/Netherlands.
However, Next Generation EU (2020) used joint borrowing during COVID.
German Constitutional Court (Dec. 2022) ruled it legal.
tensions within the Troika
The three Troika members had different institutional logics and priorities:
IMF: Focused on debt sustainability and realistic fiscal targets; more cautious and data-driven.
European Commission: Bound by EMU rules, especially the Stability and Growth Pact (SGP).
ECB: Concerned with fiscal dominance, i.e., having to take on fiscal responsibilities at the cost of its price stability mandate.
These tensions affected policy coordination and programme design (see Lütz, Hilgers & Schneider 2019).
changing IMF approach
The IMF’s role during this crisis reflected a broader shift away from the Washington Consensus:
Less emphasis on market liberalization and austerity.
More focus on macro-relevant, targeted reforms.
Incorporation of more Keynesian ideas (e.g., stimulating demand, flexible fiscal policy).
ECB as a central actor in the EMU
The ECB, as the only truly supranational institution in the EMU, played a pivotal role:
Helped stabilize the Eurozone by buying government bonds on secondary markets.
Took on functions normally reserved for fiscal authorities, due to the lack of a common fiscal union.
Yet, the ECB pushed for the creation of additional support mechanisms, highlighting the incompleteness of EMU fiscal governance.
incomplete fiscal union and fiscal reform
A full fiscal union (with common taxes and spending) remains politically unacceptable.
Instead, the EU opted for piecemeal reforms:
New lending mechanisms (EFSF, ESM).
Stronger rules and oversight under an enhanced SGP (Six Pack, Two Pack, Fiscal Compact).
gov trends: supernational or intergovernmental?
The crisis response showed both trends at once:
Supranational strengthening:
European Commission gained more enforcement powers under the new SGP rules.
Intergovernmental dominance:
European Council led on key decisions and treaty changes.
Result: A hybrid system — intergovernmental decision-making with supranational implementation.
broader institutional implications
No complete institutional overhaul, but deeper integration of economic governance in the EU.
Described as “failing forward” (Jones, Kelemen & Meunier 2016):
Crisis exposed flaws → patchy reforms that moved integration forward without solving core issues.
The Troika itself became an example of inter-organizational (inter-IO) governance:
Cooperation across regional (EU) and global (IMF) institutions.
But also revealed challenges in coordination across different levels and mandates (Lütz et al. 2019).
what is bureaucratic culture?
the formal and informal rules, routines, and organizational identities that shape how international bureaucracies (IBs) interpret their environment, formulate preferences, and make decisions.
-> explain how IOS staff respond in patterned ways to external challenges—not always adaptively, but in ways expected by their internal logic.
5 mechanisms through which bureaucratic mechanism shapes IO behaviours
- Prescribing action through formal rules.
- Shaping perception of problems and priorities.
- Making the world amenable to intervention using models and assumptions.
- Developing policy-specific routines that become templates for action.
- Forming organizational identity, which guides consistent behavior.
what is the Troika (and what exactly each of its institutions focus on)?
- IMF: “The Accountant”
◦ Prioritized debt sustainability and repayment.
◦ Emphasized realistic, structural fiscal targets and macro-critical reforms.
◦ Advocated debt restructuring in Greece and Ireland when repayment seemed unlikely.
◦ Applied flexible conditionality, but insisted on credible repayment plans.- European Commission: “The Europeanist”
◦ Focused on compliance with EU law and promoting EU-wide competitiveness.
◦ Emphasized nominal fiscal targets to preserve the integrity of the Stability and Growth Pact.
◦ Pushed for deep structural reforms, even beyond short-term fiscal needs (e.g., water charges in Ireland, tax administration in Greece). - European Central Bank: “The Monetary Guardian”
◦ Concerned with Eurozone financial and monetary stability.
◦ Opposed debt restructuring to avoid market contagion and disruption to monetary transmission mechanisms.
◦ Advocated fiscal discipline to prevent “fiscal dominance” over monetary policy.
◦ Limited structural reform engagement, reflecting a narrower mandate and lack of routines.
- European Commission: “The Europeanist”
what are the tensions within the Troika in the Greece case
- Conflict over debt restructuring: IMF pushed for it; EC and ECB resisted due to contagion fears and legal gaps.
- Fiscal targets: IMF adjusted its stance over time, criticizing excessive austerity. EC/ECB stuck to nominal goals.
- Structural reforms: EC pushed for extensive reform; IMF emphasized only macro-critical elements.
what are the tensions within the Troika in the Irlande case
- IMF advocated bail-in of senior bondholders to protect public finances; ECB vetoed this, citing contagion risks.
- IMF pushed for cautious fiscal adjustment; EC/ECB demanded fast consolidation to meet SGP targets.
- Less emphasis on structural reform due to earlier Irish reforms; EC still pushed measures like water charges, reflecting EU norms.
