The European rescue of the Washington Consensus? EU and IMF lending to Central and Eastern European countries

ABSTRACT

The global financial crisis has transformed the relationship between the International Monetary Fund (IMF) and the European Union (EU). Until the crisis, the IMF had not lent to EU member states in decades, but now the two organisations closely coordinate their lending policies. In the Latvian and Romanian programmes, the IMF and the EU advocated different loan terms. Surprisingly, the EU embraced ‘Washington Consensus’-style measures more willingly than did the IMF, which much of the contemporary literature still portrays as an across-the-board promoter of orthodox macroeconomic policies. We qualify this stereotypical characterisation by arguing from a constructivist perspective that the degree of an organisation's autonomy from its members depends on the interpretation of its mandate. IMF staff viewed the Fund's technical mandate as an opportunity to react rather flexibly to the challenges of the latest crisis. By contrast, European Commission, as well as European Central Bank (ECB), staff interpreted the vast body of supranational rules as necessitating stricter adherence to economic orthodoxy. Thus, IMF lending policies were more flexible and, at least on fiscal issues, also less contractionary.

KEYWORDS:

• International Monetary Fund (IMF)
• European Union (EU)
• European Commission
• European Central Bank (ECB)
• Washington Consensus
• financial crisis

ACKNOWLEDGEMENTS

This article, the title of which borrows from The European Rescue of the Nation-State by Alan Milward, is a considerably revised version of a 2010 LEQS Working Paper. We presented the first draft at the 51st ISA Annual Convention in New Orleans (17–20 February 2010). To a lesser extent, the article also contains parts from a subsequent conference paper at the 52nd ISA Annual Convention in Montréal, Canada (16–19 March 2011). Apart from all the panel participants, we are indebted to Thomas R. Eimer, Vassilis Monastiriotis, Waltraud Schelkle, Christian Schmieder, two anonymous reviewers and the RIPE editors for insightful comments that improved the final manuscript. Maximilian Bracke, Ian Canaris, Stephan Kreutzer, Sibylle Schaefer, Daniel F. Schulz and Andreas Storz provided invaluable research assistance. We gratefully acknowledge travel funding from the Center for International Cooperation (CIC; grant no. FM2011-426) at the Free University of Berlin and, finally, thank all of our interviewees for their time and effort.

Notes

¹During that period, we conducted a total of 30 non-standardised semi-structured interviews on IMF–EU coordination and broadly related topics. Having promised our interviewees confidentiality, we refer to the interviews cited herein by general anonymous labels of professional position, such as ‘IMF country representative’ or ‘European Commission staff member’.

²Romania's first SBA (from May 2009 to March 2011) was followed up immediately by another two-year SBA.

³Gould (2006: 5–13) discusses in greater detail competing theoretical explanations of loan conditionality, which applies to IMF policies in general.

⁴The United States holds nearly 17 per cent of the total votes. The EU member countries account for about 31 per cent.

⁵Unfortunately, we have to rely on oral instead of written evidence here: IMF Executive Board minutes become available only after five years unless ‘classified’ (IMF, 2010c: 659–60) so that those of interest have not yet been published. Neither the Council nor the EFC releases minutes and voting outcomes. Council proceedings are made public only ‘where the Council acts in its legislative capacity’ (Council of the European Union, 2004: Art. 7 with Art. 8–9), which does not apply to crisis lending. Likewise, the sessions of the EFC are subject to confidentiality according to Article 12 of its statutes (Dyson and Quaglia, 2010: 791).

⁶Latvia is another illustrative example of the consequences of debt exposure. With about as much as 90 per cent of its outstanding loans denominated in foreign currency (IMF, 2009h: 10), it turned into an especially worrisome case for Sweden and other Nordic countries, which, through their banks, had become the most exposed foreign creditors in the country. To avoid a currency devaluation, these countries offered bilateral loans to Latvia.

⁷Partly overlapping memberships point to a potential methodological problem: European countries are not alone at the IMF Executive Board. But as we have shown, the US was rather indifferent as to the details of the loans to Hungary, Latvia and Romania. The remaining member countries seem to have had little leverage in these cases. Their biggest concern might have been that European members would get a ‘free ride’ relative to those countries that had previously shouldered harsh loan conditionality.

⁸See Leiteritz (2005) on how the Asian crisis affected the politics of capital account liberalisation at the IMF.

⁹Data available at <http://www.imf.org/external/np/fin/tad/extarr11.aspx?memberKey1=ZZZZ&date1key=2011-12-31> (accessed 13 August 2012).

¹⁰Still, one arrangement can impose additional conditions that the other does not include.

¹¹One minor exception was IMF (2009b: 11) staff's divergent view on Hungary's 2009 budget: it would have preferred ‘a slightly higher deficit target to limit the procyclicality of fiscal policy’.

¹²It is important to note that deficit figures can belie actual fiscal policies. A simultaneous GDP contraction that exceeds the amount of spending cuts (in real terms) produces a larger deficit, which is not the same as enacting counter-cyclical fiscal policies. Moreover, the IMF's flexibility in revising initial deficit targets is amplified by its (over-)optimistic growth forecasts (Gabor, 2010: 822–3). We thank one reviewer for clarifying these related points.

¹³Exempted were ‘pensions and allowances for those accompanying handicapped people with a first degree handicap’ (EU, 2010: 6).

¹⁴To date, Colombia, Mexico and Poland have subscribed to the FCL.

¹⁵The PLL was launched in November 2011 as a replacement of the similarly designed Precautionary Credit Line (PCL), which had been in existence for just over a year (IMF, 2010b, 2011a).

¹⁶The loan arrangements with Hungary and Latvia were concluded (under the Emergency Finance Mechanism for ‘rapid assistance’) before the decision on access limits.

¹⁷The European Treaties, or ‘primary EU law’, do not constitute the only source of legal obligations for the Commission and the Central Bank. Other obligations (‘secondary law’) are derived from these Treaties, as well as from stipulations that lay outside the Treaties (‘supplementary law’; see <http://europa.eu/legislation_summaries/institutional_affairs/decisionmaking_process/l14534_en.htm> (accessed 8 August 2012).

Additional information

Notes on contributors

Susanne Lütz

Susanne Lütz is Professor of International Political Economy at the Otto Suhr Institute of Political Science at the Free University of Berlin, Germany. Her primary research interest lies in the comparative political economy of market regulation, particularly the regulation of finance. She edited the 2011 RIPE special issue on ‘Transatlantic Regulation’ (Vol. 18, Issue 4) and is currently studying creditor-debtor interaction in the wake of the current European debt crisis. Email: [email protected]

Matthias Kranke

Matthias Kranke is a research assistant at the Center for International Political Economy at the Otto Suhr Institute. His current research focuses on international economic organisations, especially on the IMF's relations with other organisations. Email: [email protected]