The functionality of the International Monetary Fund has been a matter of debate since its inception. One of the most notable critiques of the Fund is the conditionality of its loan packages. In most cases, through structural adjustment programs, the IMF requires that a country cuts its expenditures, promotes free trade and foreign investment initiatives, and privatizes certain assets. Often times, these conditions are not feasible demands for countries to meet. It’s also worth noting that many of the countries that the IMF lends to are not likely to be able to pay the Fund back. Some economists have argued that IMF bailouts actually do more to hurt the global economy by creating moral hazard and causing more instability.
After the Global Financial Crisis of 2008, the country of Greece experienced a severe economic downturn which still hasn’t really subsided. The Greek Depression was partially due to the miscounting of high levels of debt and the unawareness of the government’s high deficit. As a result, the government cut a lot of spending and made a lot of tax increases, which led to further turmoil within the country. Greek citizens reacted with a series of protests and riots, out of opposition of the government’s austerity measures. According to Anders Aslund, the reason why the Greek Debt Crisis happened 2 years after the global financial crisis is because the European Central Bank provided Eurozone countries with cheap liquidity and their governments spent a lot of the money without serious reforms.
There is currently a debate in the Eurozone about how countries like Greece, Spain, and Portugal should overcome their debt crises. Although many economists are skeptical, Germany has been strongly supportive of another bailout for Greece. Critics of Germany’s stance have suggested that Germany is only in favor of another Greek bailout to promote its own self interests. It has been argued that Germany is taking advantage of the Euro crisis to maintain a weak exchange rate and a substantial export advantage. The European Union’s main bailout fund, the European Stability Mechanism, agreed to a third bailout for Greece. However, the IMF has not agreed to participate in another Greek bailout without certain recommendations. Since Greece is unable to repay the $300 million it already owes to the IMF and the European Central Bank, the IMF sees Greek debt as unstable. Therefore, the International Monetary Fund has suggested that debt relief should play an important role in a new bailout program for Greece, while Germany has stood firmly against it. If the accusations about Germany’s reasoning for bailing out Greece are true, it would make sense for the country to not value the importance of Greek debt relief because it wouldn’t necessarily benefit Germany. Germany is supposedly depending on the Euro to remain weak.
Previous failures in the handling of other financial crises may have contributed to the reluctance of the IMF to participate in another bailout program for Greece. For example, in 2010, the ECB and the IMF bailed out Greece under certain conditions that were not met. As pointed out by Anders Aslund, the IMF was lenient toward Greece during this bailout because of its Eurozone status. The Fund even contributed to a second bailout program for Greece in 2012. However, after Greece’s debt problem has continued, the Fund has become less willing to participate in another bailout without serious consideration for debt relief and the restructuring of the Greek economy. It is likely that the IMF has reassessed its role in certain bailouts after so many failures.
Possibly influenced by ongoing criticism from various sources, the International Monetary Fund is somewhat changing. The Fund is known for its neoliberalist ideology which pushes for free trade, austerity, privatization and cutting expenditures. However, there is reason to believe that the IMF has moderated its neoliberal views. When it comes to austerity, the IMF has become open to considering debt repayment without huge budget cuts. Christine Lagarde, Managing Director of the IMF, has also supported the U.S Congress for its decision to raise the debt ceiling. According to Lagarde, “the point is not to contract the economy by slashing spending brutally now as recovery is picking up.” It is reasonable to conclude that the IMF has in fact learned from the mistakes that it has made with managing crises in the past. It is hard to tell what direction the Fund will take moving forward, but it is likely that it will continue to make adjustments if it wants to maintain an important role in the global economy.