Latest Developments as of December 2017

Christine Lagarde, in her reaction to the Internal Evaluation Office report (IEO, The IMF and the Crises in Greece, Ireland, and Portugal. Washington, DC, IEO of IMF, July 16, 2016) regarding the International Monetary Fund’s (IMF) response to the crisis in Greece, Ireland, and Portugal, stressed that Greece is, or proved to be, a special case. Reading carefully both the report and her comments, one can easily see that the political economy failure of the program is highlighted, especially as regards 2010–2012, when the government denied taking ownership of the program, which in turn undermined its adequate and proper implementation. The implication in turn is that the Fund failed to react in time and press the government to implement agreed structural reforms. The IMF also failed to adopt the real spirit of the program and believe in its success. So, the lopsided implementation of the conditionality program in Greece described in Pelagidis and Mitsopoulos (Greece. From Exit to Recovery? Washington, DC: Brookings, 2014) appears to have emerged as an outcome of the distortion to the program caused in practice by the rent seeking behavior of Greece’s domestic political system. This distortion primarily came from placing all the burden of adjustment on revenue-increasing measures that largely shielded the sprawling state and privileged groups who thrived on growth-suppressing measures included as part of program conditionality. This rent seeking persisted, even though it risked the success of the program and soured Greece’s relations with its European partners. What is striking is that the supervising representatives of the official lenders and the Fund in particular accepted, and substantially cosigned, this strategy and for so long. This fact becomes even more surprising considering that, as initially drafted, the conditionality program contained a very balanced mix of fiscal consolidation measures, with tax increases and cost cutting on the one hand, and growth-enhancing reforms on the other.