Commission and IMF clash over austerity approach

Deep and festering divisions between troika members, the IMF and the European Commission, came to the surface with Brussels defending itself and retaliating against criticisms by the Washington-based body.

There have been carefully concealed divisions between the two bodies over the four programmes they are involved with, including Ireland, where the most recent disagreement was over the approach to the housing mortgage issue.

But the IMF’s staff document on Greece pulled no punches, admitting they had made mistakes in their handling of the near melt-down in that country, but blaming the European Commission.

This follows a study by their chief economist last year that found they had underestimated the effect on growth of the austerity measures in all programme countries — a finding disputed by the Irish authorities at the time.

This latest report — which as a staff document does not necessarily have the backing of the executive board — also says that Greece will need additional help in 2020 and its public debt threatens any recovery.

Acknowledging that Athens is meeting key targets ranging from budget cuts to changes in employment legislation, it warns that investors are unlikely to return and help growth because of the debt overhang.

The IMF say debt should have been restructured in 2010 — something the EU leaders rejected, insisting bondholders could not be burned. This resulted in the banking system losing 30% of its deposits, the economy having a much deeper than expected recession and exceptionally high unemployment.

The EU agreed to restructure and a deal was agreed with the IMF in 2012 with €130bn of additional loans. Earlier this year the IMF insisted the Cypriot bailout be limited to €10bn.

The report admitted the troika had major problems agreeing their aims, citing the EU’s lack of experience in sovereign rescues, saying it led to considerable uncertainty on the Greek programme, including debt restructuring.

There was no proper division of responsibilities, with the Commission more focused on ensuring compliance with EU standards than on how to stimulate Greek growth, and emphasising the dangers of contagion to other eurozone countries, it said.

Commission spokesperson Simon O’Connor said they fundamentally disagreed that debt should have been restructured in 2010. “The report ignores the interconnected nature of the member states — private sector debt restructuring would have risked systemic contagion and severely undermined the programme — this as the unanimous opinion of the member states and the troika partners”.

He said the claim that not enough was done to identify growth-enhancing reforms was “plainly wrong and unfounded. The Commission has been a major driving force behind major structural reforms”.