The IMF and the European Debt Crisis

Books, January 5, 2024

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Explores the Fund’s engagement in Europe in the aftermath of the 2008 global financial crisis, and especially after 2010.
Examines how, why, and with what consequences the International Monetary Fund—along with the European Central Bank and the European Commission (together known as “the troika”)—supported adjustment programs in Greece, Ireland, Portugal, and Cyprus.
Describes the IMF’s role in monitoring Spain’s adjustment program and in exploring modalities for supporting Italy.
Analyzes how euro area developments interacted with and affected the rest of Europe, including eastern and southeastern Europe and the United Kingdom, where the political fallout from post-financial crisis populism—in the form of “Brexit”—was the most extreme.

Crisis programs centered on debt sustainability for Greece, Ireland, Portugal, and Cyprus.
Greek case:
- After an intense internal debate, the IMF initially chose a program without debt reduction.
- Rationale: fear that debt reduction could trigger a panic of banks and other creditors and generate contagion for the rest of Europe.
Ireland and Portugal:
- Learning from the Greek case, the IMF pushed for debt reduction.
- The government in Ireland was sympathetic to debt reduction; the government in Portugal was not.
- Outcome: there was no private sector debt reduction in Ireland and Portugal.

IMF European programs embroiled the Fund in controversies over:
- Exceptionally large lending.
- Whether or not to impose losses on private creditors.
- The mix between external financing and internal adjustment undertaken by program countries.
Programs forced the IMF to confront longstanding questions about its governance and evenhandedness in the treatment of different segments of its membership.
European programs became focal points in broader geopolitical debates about the appropriate role of the Fund after the global financial crisis.

The book examines intellectual and policy shifts that took place in the IMF as a result of controversies about its European programs.
Concludes with reflections that all the programs produced genuine policy reform and held out the possibility of a return to growth and prosperity.

The IMF and the European Debt Crisis, Harold James, January 5, 2024.