Go to the Globe and Mail homepage

Jump to main navigationJump to main content

A picture taken 28 June 2005 shows a giant Euro symbol, standing in front of Frankfurt's Eurotower, which houses the European Central Bank (ECB). (JOHN MACDOUGALL/AFP/Getty Images)
A picture taken 28 June 2005 shows a giant Euro symbol, standing in front of Frankfurt's Eurotower, which houses the European Central Bank (ECB). (JOHN MACDOUGALL/AFP/Getty Images)

Eric Reguly

If only the EU had listened to Strauss-Kahn's rescue plan Add to ...

One of the tragedies of Dominique Strauss-Kahn's epic fall from grace is that the man was a fine boss of the International Monetary Fund. If the courts prove him to be a criminal pervert, his IMF years will be scrubbed from the collective consciousness, to be replaced by the graphic details of a baffling act of self-destruction in a $3,000 (U.S.) Manhattan hotel room.

More related to this story

In spite of DSK's penchant to spend lavishly on personal luxuries, the IMF under his rule was very good at telling governments how to control their own spending. When those governments ignored the IMF's warnings, it was very good at suggesting ways to repair their national finances.

To wit: If the European Union leaders had done what the IMF said needed to be done in Greece, the country probably would have been on its way to recovery, stemming the euro zone debt crisis. Instead, the EU sidelined the IMF and created a mess that is getting worse by the day. The EU's strategy is to buy time by throwing good money after bad.

By late 2009, shortly after George Papandreou's socialists swept to power in Athens, everyone who could spell "deficit" knew that Greece was on a financial suicide run. The new government revealed that the old government's budget deficit and debt projections had been wildly under-exaggerated, year after year, to give the appearance that Greece had more or less met the Maastricht debt limits for inclusion in the euro zone (the club of countries, now 17, that share the euro).

In a note on the voxeu.org economists' site, Jeffrey Frankel, economics professor at Harvard's Kennedy School of Government, noted that "the Greek government had broken the rules so egregiously and so frequently that Europe's leaders could, with a clear conscience, judge a firm stand to be merited."

Instead, Europe's leaders did a fair imitation of a shrinking violet. The IMF - under the then savvy and politically astute DSK (as he was known at the IMF and in France, where he was touted as the most likely candidate to unseat President Nicolas Sarkozy) - would have gladly come to the rescue of Greece in early 2010, with its trademark package of loans, ultra-strict conditions and tradeoffs designed to crunch debt payments to sustainable levels.

Instead, the EU decided that Greece was the EU's problem and glommed on to the Greek file. It did so even though it had no experience in managing a debt crisis and lacked credibility on the fiscal discipline front. The EU's Stability and Growth Pact (SGP) limited budget deficits to 3 per cent of gross domestic product, and national debt to 60 per cent of GDP. Over the years, the 3-per-cent limit was blown out of the water by almost every EU country, among them Germany, France and Italy. Countries that exceeded the limit theoretically faced punishment but ended up paying no fines. So much for setting an example for Greece.

Predictably, the EU dithered for months about how to solve the Greek debt crisis and prevent it from spreading to the walking wounded elsewhere in the euro zone. German Chancellor Angela Merkel fiddled while Greece burned and a full-blown debt crisis was born - Greece didn't get its €110-billion ($152-billion) bailout package (partly financed by the IMF) until May. By then, sovereign bond yields were soaring across Europe.

The bailout of Greece, of course, violated the EU's own "no bailout" clause, delivering the message that - fear not - any country that destroyed its financial health could get emergency loans. Sure enough, Ireland, then Portugal, joined the list of bailout victims.

Now imagine if the IMF had been handed the Greek file. Using its hard-ass, dispassionate stance - the IMF has no particular emotional attachment to the euro zone - it would have insisted on deeper and quicker reforms than those imposed by the EU. Greece would have been an IMF bailout, not a EU one, and the country might have reversed its slide quickly.

Instead, Greece's debt problem is getting worse. Greece is clearly insolvent, yet the EU is preparing to hand the country another bailout package that it cannot repay. On Wednesday, the clearly frustrated IMF warned Greece that continued IMF support is dependent on Athens redoubling its reform efforts.

Dominique Strauss-Kahn's career at the ECB is all but finished. It is small consolation to him that his Greek fix-it plans, had they been adopted early last year, might have prevented a debt problem in a tiny country from ripping through the euro zone. The EU is keen to ensure another European replaces DSK - the job traditionally goes to a European while the top job at the World Bank goes to an American. But why should the EU care? Based on the Greek fiasco, it would be happy to ignore the advice of anyone who leads the IMF.

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular