Who is responsible for the crisis? Has the Troika contributed or relieved the crisis? Could it and even should it have been more democratic? Those are key questions that sounded last week in Strasbourg during the inquiry of the economic committee of the European Parliament of the work of the trio of institutions - the European Commission, the European Central Bank and the International Monetary Fund - on saving Greece, Ireland, Portugal and Cyprus from default. The European Parliament, form the very inception of the Troika, has been sending heavy criticism about its work because, according to most MEPs, this has led to deterioration of the economic situation in the affected countries rather than improvement. But is that so?
Two members of the very influential in the EU economic committee of the European Parliament are co-authors of a draft report on the work of the Troika and in addition to that the committee members held a series of hearings of key decision-makers and participants in the work of the Troika. Last week, subjected to cross fire were the first vice president of the European Commission, Olli Rehn, who is responsible for the economic and monetary affairs of the EU and the euro area, the former ECB chief Jean-Claude Trichet, the chief of the permanent bailout fund of the euro zone Klaus Regling and, this week, before the MEPs appeared Greece's finance minister Yiannis Stournaras. According to the schedule, he was supposed to speak only in his capacity as chairman of the Ecofin council because Greece assumed the Council presidency of the EU on January 1st. And although he had presented written answers as part of the committee inquiry, in the course of an hour and a half the MEPs wanted him to answer for everything that was done and not done by the Greek government.
To default out of stubbornness
In their draft report, MEPs Othmar Karas (EPP, Austria) and Liem Hoang Ngoc (S&D, France) make a very objective analysis of the situation before and after the Troika, underscoring that the reasons for the crisis in the four countries (Spain is a separate case) were different. In Greece, the hardest affected member state, which put to the test the very existence of the Economic and Monetary Union (EMU) of the EU, had a budget deficit of 15.7% of the gross domestic product before the rescue programme and the debt-to-GDP ratio was 129.7% in 2009 and 156.9% in 2012. Just to compare, Greece's debt was already too high - 97.4% - in 2003 when there was not even a shadow of doubt of an upcoming crisis.
The co-authors of the report criticise the lack of adequate statistical data and information as well as the wide scale fraud which were a phenomenon long before the designing of the rescue programme. Instead of turning into a conviction, the report represents a solid foundation for analysis and consideration for the future. And although in the economic committee, but also in the plenary, through the years severe criticism could be heard against the work of the Troika and demands the trio to be immediately dismantled, in Othmar Karas's and Liem Hoang Ngoc's report it is admitted that the EU and the international institutions, including the IMF, were not prepared for a debt crisis of such a scale. It is recognised, however, that to a large extent the Troika's work was impeded by the bad situation of the regulation of financial services, the huge macroeconomic imbalances and the fact that many instruments, like external devaluation, were not available at the time.
Still, the authors criticise the lack of transparency in the negotiations of the adjustment programmes. Criticisms that neither of the heard Troika representatives or other officials agreed with. Olli Rehn explained several times that the inception of the Troika took place under extreme political and time pressure to prevent default. Later, the member states made the Troika completely official with the treaty for the permanent bailout fund of the euro area - the European Stability Mechanism (ESM) - and also with the package of two legislative proposals, known as two-pack. Mr Rehn emphasised that the most important thing for the success of the adjustment programmes was to take ownership of the programme. This happened on its own in Ireland and this is the country that successfully exited its rescue programme after three year-long painful reforms.
Alas, in Greece did not happen precisely this, which was the root cause of the problem with the fiscal multipliers that evolved into a conflict between the IMF and the EU. Olli Rehn explained, however, that the forecasts do not take into account political instability or disturbances and that political factors had played their role. In Greece, political disturbances and the lack of unity weakened the efforts for structural reforms, especially in the first two years of the programme. This had negative impact on the economic growth and created further turmoil outside Greece, which raised the question whether Greece should stay in the euro area, said Olli Rehn. He recalled also that the Cypriot authorities, too, preferred the harder option and instead of responding to the European Commission's concerns, expressed two years before the programme, they preferred to borrow unconditional money from Russia.
In Portugal, as well, consensus was reached among the main political parties for reforms, although required by the Commission. Alas, that consensus has started to fade away in the past year and a half and it can safely be suggested that this is one of the reasons why Portugal is still incapable to exit its programme. Anyway, the responsibility for the reforms lies with the member states, Olli Rehn said. "There is no doubt that the structural adjustment from accumulated macroeconomic imbalances to sustainable economic development involves difficult and often painful choices. Here the responsibility must in the first place be carried by those who let these imbalances accumulate, with all their social consequences", explained Jose Manuel Barroso's deputy.
He reminded that in no way had any conditionality been imposed on anyone, but that it was agreed and then approved by national parliaments. Olli Rehn explained also why the criticism of a lack of democratic legitimacy was unfounded. "The IMF staff is accountable to its board and ultimately to the board of governance. ECB is accountable to the board of governance. Decisions on the EFSF/ESM are taken by the board of governance which comprises of ministers of finance who are accountable to their parliaments".
ECB's former governor Jean-Claude Trichet, who played a key role in the immediate responses to the first symptoms of the crisis, explained things even more directly, saying that the hardest thing in solving the problem was that some countries spent more than they earned. Another problem, according to Trichet, was that many countries in the beginning had no desire to participate in the rescue of Greece and believed that this was the job of the IMF only. He also recalled that the big countries in the EU refused to abide with the Stability and Growth Pact. Trichet refused to take responsibility for all his deeds, as Portuguese MEP Marisa Matias from the Confederal group of the United Left insisted, but instead passed the responsibility onto the member states. And regarding transparency in the decision-making process, he recalled several times that the first phase of the crisis was that of the speculators. That was why it was necessary many of the decisions not to be made public.
Trichet agreed with the MEPs that, indeed, the Troika, in spite of the useful work it does, should be gradually phased out. Klaus Regling, the ESM chief, however does not share that opinion. He underscored that he supported the Troika's economic approach because many euro area member states and the monetary union itself were in an "existential crisis". He explained that those who believe that there was another approach that includes less belt-tightening, miss the point. And the point is that the alternatives to the current practises in the programme countries would not have been less painful, but on the contrary. Generally, he recalled, the loans under the rescue programmes, bought time for the troubled states. And the alternative was a default of the country, a collapse of its economy and leaving the eurozone. This would have led to much greater problems than today's. The history of the IMF keeps records of such cases, he added.
Klaus Regling disagreed also with the thesis that the Troika was imposing economic, fiscal and social policies without political control, accountability, transparency and democratic legitimacy. "The Troika gives advice. It does not take final political decisions. The political decisions are taken by democratically elected euro area governments. In most programme countries, the national parliaments voted on the MoU and again on most of the individual steps that needed to be taken subsequently".
In support of what Olli Rehn, Jean-Claude Trichet and Klaus Regling said were also the written answers of Greece's minister of finance Yiannis Stournaras. He points out that in the middle of 2009 the government proposed an entire set of fiscal measures, but the early elections in October that year interrupted their implementation. He said that all rescue programmes so far passed through parliamentary approval. Hannes Swoboda, the leader of the S&D group in the Europarliament, said those were decisions taken at gun-point. Mr Stournaras confirmed, adding that the Greek parliament did not take part in the negotiations because the Constitution did not grant it such rights. Besides, the urgency and the extremely pressing deadlines for signing the bailout agreements did not allow for continuous discussions.
Success of failure?
The pre-crisis levels of debt and budget deficit in Greece were terrifying. In 2009, the deficit was above 15 per cent. After the work of the Troika and the national authorities, however, it declined to 2.2% of GDP in 2013. This, in his words, was the fastest and greatest fiscal adjustment ever done by an OECD member state. The price, though, is extremely high. The gross domestic product shrank by 25% in that period and the unemployment skyrocketed at 27%. Nonetheless, the Greek minister sounded optimistic during his hearing in the economic committee this week. He said the situation with the indebtedness was not as bad as figures suggested and announced that the government will soon present a 10-year growth strategy.
One of the most positive benefits from the Greek economic and, hopefully, political catharsis is that a real fight against corruption at all levels has begun. Mr Stournaras was subjected to devastating criticism by Green MEP Philippe Lamberts (Belgium) who blamed the government for sheltering the rich from the painful measures. Stournaras answered that many rich Greeks were already in prison. In confirmation of this is a publication in The New York Times which says that Greek prosecutors are much more independent from the politicians than before. For the first time the prosecutors have such an influence as a result of the three years severe austerity and of the citizens' demands for punishment of those responsible for their country led to the brink of default.
The Troika's future
Many influential MEPs, among whom Elisa Ferreira (S&D, Portugal), demand the Troika to be dismantled precisely because it rather played a negative role in solving the crisis than it saved the day. This is visibly refuted by the report of MEPs Othmar Karas and Liem Hoang Ngoc. During the hearings it also became clear that the Troika was an emergency solution. Since the beginning of the crisis to date the Stability and Growth Pact has been deeply reformed (the EU's economic governance and the eurozone's in particular). There already are many tools for prevention and assistance. Still a lot of work is to be done on the construction of the banking union.
According to Olli Rehn, the future and governance of the Troika has to be part of broader institutional discussions about the deepening of the integration in the euro area. The Commission's leading principle, however, is that stronger solidarity can only be demanded in exchange for stronger responsibility. And that, for its part, can happen only if a very profound democratic process is ensured, Olli Rehn told the MEPs. This will hardly be to the likes of the citizens of the countries that suffered the most from the bust of the illusion that a fast enrichment is possible in the EU. Currently, the Troika is the most hated body in these countries and in spite of all legal issues it would have only gained if it had worked closely with the European Parliament from the very beginning. This would have saved all the speculations and in the end of the day the huge tensions in the EU along the axis "poor laggards" and "rich donors".