Troika on the brink of implosion

The “Men in Black” of the Troika are edging towards a divorce. Three years after it was formed outside of any legal framework provided by the European treaties, this body with three chiefs meant to steer the reform programmes for Eurozone countries threatened with bankruptcy, is riven by tension. The strife has sparked a debate in Brussels on what comes after the troika.

Established during the “rescue” of Greece in May 2010, the unpopular troika is now working with the governments of three Eurozone member states, Portugal, Ireland and Cyprus. It’s the troika that sets out the list of cuts, structural reforms and other privatisations that a country must commit to if it wants, in exchange, a mega-loan to stave off default. The IMF also provides advice to the European Council on reforming the Spanish banking sector.

In three years, this structure with its opaque inner workings has come to symbolise an authoritarian management of the crisis that has pushed Eurozone capitals to the wall, and forced them to push through reforms rejected by many of their citizens in order to stave off bankruptcy.

Logically, this troika will dissolve once the bailouts are finalised – by 2016 for Cyprus, according to the official deadlines. The problem: on the ground, the [recovery] still seems fragile (Ireland), or downright non-existent (Greece). Other mega-loans may still turn out to be necessary and will keep up the torment. This weekend the Europeans and the IMF are to meet in Washington to discuss a new aid package to Greece.

Fearing Pandora’s box

If Brussels does not dare move forward in a frank manner on this issue, it is above all because the member states – Germany in the lead – do not want to open Pandora’s box. Replacing the troika would no doubt give yet more powers to the European Commission, moving it closer to a “European Monetary Fund” – a scenario that would not necessarily be any more popular in the eyes of many of the continent’s citizens.

However, the tension is building from all sides. The main explanation is the growing unease of the IMF, which is trying to limit the damage and hold onto what little crisis management legitimacy it still retains. In the spring of 2010 it was Berlin that was pushing hardest for intervention from the Washington institution, headed at the time by Dominique Strauss-Kahn. The involvement of the IMF was even one of the conditions laid down by the German Parliament, the Bundestag, to validate each aid plan that comes up.

[[The IMF, however, disagrees with the way the crisis is being managed and now it wants that to be made public]]. The report it published in June came as a bombshell. Criticising the bailout for Greece negotiated in 2010, the institution explained that, in its view, it would have been better to “soften” the austerity policy by allowing a partial write-down of the country’s public debt – a scenario ruled out at the time by Paris and Berlin.

Another piece of evidence was the Wall Street Journal’s article last week based on internal IMF documents that say that as early as May 2010, more than 40 IMF member states, all outside Europe, were opposed to the aid plan drawn up for Athens.

Questioned in June on the subject, Christine Lagarde attempted to calm the anger: “The members of the troika have had a very strong and productive relationship over the past three years,” she said, touting the “innovative” character of the adventure. No one was fooled, though. The calamitous management of the Cypriot crisis at the start of the year has left scars. The IMF has decided to offer only 10 per cent of the volume of global aid freed up for Cyprus – as opposed to a whole third in the previous bailouts. The IMF’s disengagement from the Eurozone crisis is already underway.

Gradual disengagement

To a lesser extent, the ECB has also distanced itself from the day-to-day management of the troika. The bank’s board of governors in Frankfurt increasingly fear for the sacrosanct independence of their institution. “The ECB does not accept interference from governments,” believes Paul De Grauwe, a Belgian economist and professor at the London School of Economics. “But that independence should work in both directions: it means equally that [[the ECB must refrain from intervening in highly political decisions with its advice on taxes or cuts in spending. And yet that is just what it has been doing inside the troika. It must get out of it as soon as possible]]”.

Hauled before MEPs in late September in Brussels, ECB President Mario Draghi tried to play down a little more the role of the ECB in the troika. Its role was nothing more than that of a simple advisor, “in liaison with the Commission”, to provide “technical expertise”. It is only one step from saying that the ECB will advise the troika externally...

While the IMF and the ECB are trying to save face, given the now obvious fiasco, it is left to the European Commission, the stoic in the storm, to pick up the – disastrous – balance sheets left by the three years of the troika’s management.

As the European elections approach, has José Manuel Barroso, so quick to worry about the rise of “populism” on the continent, grasped what is going on? His colleague Olli Rehn is unabashed: back in August the Finn declared his desire to stand in the elections as the possible European leader of the liberals.