Building the euro area's debt crisis management capacity with the IMF

ABSTRACT

Since the financial crisis hit the EU in 2007/8, the governance structures of the euro area have undergone significant changes, most of them incremental. There is, however, one substantial innovation: the euro area's building of its capacity to deal with liquidity crises in member states. This article seeks to explain why the governments, which initially seemed to converge on a euro-area-only approach, decided to shape their crisis management structures around an external actor, the International Monetary Fund. It argues that the concept of learning under severe time constraints and external pressure helps to understand the sudden decisions taken on crisis management and governance reform which embed the IMF in the euro area. The analysis identifies learning in three areas crucial for the design of the crisis management set-up: in the field of practical lending and programme implementation, in the understanding of the nature of the crisis and in the evolving acknowledgement of the incompleteness of the euro area's governance set-up.

KEYWORDS:

• Euro area
• crisis
• economic governance
• institutional change
• IMF
• ESM

ACKNOWLEDGEMENTS

Research for this article was conducted while I was a Fritz Thyssen Scholar at the Weatherhead Center for International Affairs at the University of Harvard in 2012/2013. I thank Anna-Lena Kirch for her research assistance.

Notes

1. This article does not further discuss the option of no financial aid and immediate debt restructuring as a default of Greece had been ruled out as a policy option early in 2010. The first explicit statement of the EU member states to back Greece and to avoid a default dates back to February 2010 (European Council, 2010).

2. One way this can occur is when a regional fund adopts a borrowing policy that privileges liquidity provision over the implementation of conditionality which can undermine the legitimacy of the Fund's potentially more restrictive policies over the long term. Another way regional arrangements could weaken the Fund is that it may eventually have difficulties to attract funds from those shareholders that are involved in regionalized schemes. Hence, it would risk losing size, its global outreach as a lender and its influence in promoting macro-economic stability through other means.

Additional information

Notes on contributors

Daniela Schwarzer

Daniela Schwarzer is Senior Director for Research and Director of the Europe Program of the German Marshall Fund of the United States (GMF). Email: [email protected]