The euro’s hellhound

Charlemagne

The Economist

It is time to reform the troika that handles euro zone bail-outs

Feb 1st 2014 | From the print edition

IN GREEK mythology, Cerberus is the three-headed dog guarding the gates to Hades. In modern Greek politics, the troika is the three-headed monster that traps the country in an economic underworld. At the finance ministry in Athens, even the cleaning ladies shout “murderers” at visiting members of the troika. In Lisbon protest banners declare “Fuck the troika”. There is now a popular Portuguese neologism, entroikado, roughly meaning “economically screwed”.

As guardian of the creditors, the troika was never going to be loved. The trio of the International Monetary Fund, the European Commission and the European Central Bank was improvised at the time of the first Greek bail-out in May 2010. It has since been at the heart of other rescues, of Ireland, Portugal and, most recently, Cyprus. Increasingly, its role is being questioned. Is the monster ripping too much living flesh from the countries it is supposed to be saving? And who controls the beast anyway?

The European Parliament has begun an inquiry into the troika’s workings. MEPs have been visiting bailed-out countries and have summoned troika officials for a grilling. Socialists accuse the troika of incompetence, even of breaching social rights in the European Union treaties, and want it abolished. Conservatives say the troika was a necessary expedient that has proven its worth, but should be replaced over time. Both sides agree that it rests on a dubious legal base and is alarmingly unaccountable.

The troika is most bitterly criticised in Greece, and with some reason. Output there has fallen by a quarter since the start of the euro crisis and 27% of the population is out of work. Though Greece has, remarkably, achieved a primary budget surplus (ie, before interest payments) it is once again at odds with its creditors, who are holding back the next tranche of loans. The timing of the dispute is awkward. Greece holds the rotating EU presidency, and its weakened government risks being humiliated in May’s European elections by anti-troika parties. Antonis Samaras, the conservative prime minister, claims the problem is caused by a fight between the IMF and the commission; Greece, he says, risks being trampled by “the two elephants”.

Indeed, the heads of the troika have often disagreed. The IMF only grudgingly accepted the ECB’s insistence that senior bondholders of Irish banks should be spared, increasing the burden on Irish taxpayers. The fund consistently argued, privately at first and then publicly, that the Europeans were pushing austerity too hard. Though it fudged the first Greek bail-out, it has become more hard-nosed in its reckoning of the sustainability of Greece’s huge debt. At first this suited Germany, supporting demands that private bondholders take losses to reduce the cost of a second bail-out (the idea horrified the ECB). Now the fund is inconvenient: reducing Greece’s debt credibly requires a write-off of official loans. Germany would rather stretch out maturities. But “extend and pretend” leaves a large overhang of debt and political uncertainty that deters investors.

Mr Samaras privately believes the IMF is taking a pessimistic view of its public finances to force Germany’s hand. He is telling the troika not to push too hard lest its demands boost the radical left-wing Syriza party, which leads the opinion polls. Germany, and by extension the commission, are sympathetic, even though Greece still has some way to go before running the big surpluses it needs to pay down the debt. For the IMF, the more serious deficit is the long list of unfulfilled structural reforms. If the Europeans really want to keep Syriza out of power, the best answer would be quickly to forgive a big chunk of debt.

The three heads of the troika have worked more or less amicably, but reform is overdue. To some extent the troika is already fading away. Ireland and Spain (which received a partial rescue for its banks) have ended their bail-out programmes and returned to the markets. Portugal might do the same this spring, perhaps helped by a precautionary line of credit. That leaves the original problem, Greece, and to a lesser extent Cyprus.

The euro’s dog days

Europhiles hope that a fully fledged European Monetary Fund, built around their rescue fund, the European Stability Mechanism, will one day take over from the IMF, and be subject to scrutiny by the European Parliament. But this would require treaty change to turn the ESM, now an inter-governmental body, into an EU institution. Germany (and other creditors) would have to agree to surrender control of their money. And getting the European Parliament involved in setting macroeconomic conditions is a recipe for paralysis.

An alternative option might be to leave the problem entirely, or principally, in the hands of the IMF. It has greater expertise and independence than the commission. True, it might not always have had enough money to finance the biggest European bail-outs. But in Greece it would have reduced the bill by cutting the debt sooner and more decisively, while in Ireland it would have bailed in senior bank creditors. The losses would thus have been imposed on those who deserved to bear them: the banks that lent cheap money to reckless borrowers.

Perhaps co-operation between the Europeans and the IMF will always be needed to deal with the unique problems of highly integrated countries locked in a single-currency zone, with a single interest rate. But the presence of the third head, the ECB, is clearly an anomaly. The central bank’s mandate does not stretch to bargaining over budget cuts and reforms to labour markets, or threatening to cut off liquidity if a country does not comply with its wishes. Now that the ECB is becoming the euro zone’s main bank supervisor, the conflict of interest is glaring. Its head should surely be the first to be lopped off.

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