The Hidden IMF-EU Controversy About GREXIT

In a conversation we had before a broadcast interview in 2012, the chief of the IMF’s mission in Athens and current head of the Fund’s European department, Poul Thomsen, acknowledged that Greece’s financial rescue plan was an experiment carrying a high risk of failure. The acknowledgment was followed later that day by his live statement that Greece’s recovery in the locked euro currency was “an experiment [that would be] very, very difficult” to pull off. Having covered the IMF in Washington DC since the genesis of the Eurozone crisis, I had never been convinced that the IMF executives involved in the Greek situation had actually believed that the country’s economy could ever get back on a sustainable path while remaining in the Eurozone.

The purpose of the IMF signing the first and the second Greek bailout program and obeying the EU political priorities has been much discussed. What hasn’t been explored sufficiently yet is whether the reason for the current IMF’s leadership decision not to countersign the third financial package to Greece is linked to the publicly acknowledged highly unsustainable debt of Greece ― or something more than that. Allegedly, behind closed doors, the IMF is seeking ways to hide the yet unrevealed assessment drawn by several of the Fund’s high-level executives. According to this assessment, the country has so far displayed an irreversible incompetence to transform itself into a competitive economy while maintaining its participation in the Euro currency.

Mr. Desmond Lachman, American Enterprise Institute scholar and former IMF deputy director, has expressed in many of our conversations the view that there is no way for Greece to restart its economy as part of the Eurozone. It can’t be ignored that decision-making centers in Washington D.C. claim that the current sequential rescue package is doomed to self destruct, just like the first and the second Memorandum did. All parties ― namely the Greek government, Europeans, IMF ―- that have participated in the “blame game” played since 2010 around the Greek problem pretend to be blind by not openly admitting what is said in private discussions. The Grexit continues to remain a likely ― although mutually undesired ― scenario.

Six months ago, the IMF’s Lagarde angered Europeans by telling the truth that the surplus targets expected from Greece by the program were “highly unrealistic.” In a private meeting we had in his office in Brussels, the head of the Euro working group, Mr. Thomas Wieser, surprisingly admitted that the Greek bailout programs had relied on overoptimistic projections not verified by the financial, political and social developments in the country. It’s absurd to believe that the IMF’s recent little-improved growth forecasts for Greece could be considered a glimpse of hope for the country’s much-needed recovery. The experience of the last six years has shown how easily these projections can be revised and maneuvered based on the Fund’s priorities and intentions regarding Greece.

Despite how it’s presented by the Greek media, the real controversy between the IMF and the Europeans is not really about whether the country’s economy is able to attain its challenging fiscal goals in a long-term. Most insiders are convinced that it won’t. The real and hidden debate between the two camps of the country’s lenders is about whether the debt relief Greece needs is going to be provided now as the IMF asks for, or in 2018 as Europe insists. Behind the disagreement, there is a deeper divergence between the IMF and Europeans. The IMF deems the need for extra debt relief as the only way to thwart, or at least decelerate, Greece’s trajectory to complete devastation and exit from the Eurozone. The Europeans are unwilling to gift Greece with such debt relief unless it’s part of a Grexit deal in 2018 when the third bailout has failed to restore the country’s lack of competitiveness. The IMF and Europe disagree about the actions, timeline and terms under which these actions should be taken. But they both agree that the Grexit as an outcome not easily reversible.

While the creditors are negotiating the best way to end the bitter fight for Greece to remain in the Eurozone, inside the country, the SYRIZA government’s executives are hiding their heads in the sand. The Greek Prime Minister Tsipras is confronting daily his pre-electoral lies through the rising anger of the people who believed in his promises. As a reaction to this, the government of SYRIZA attempts to divide the society by pitting the one social class against the other. Inspired by Erdogan’s leadership, Alexis Tsipras is shutting down private and prosperous private TV channel companies to control the sources of information the Greek public receives. The goal is to influence the information received by the public, as is illustrated by the fact that the public news agency in the country recently was proven to have spread a fabricated story that was allegedly based on orders from governmental executives.

Several middle-class private businesses are shutting down while the government is creating jobs in the public sector in exchange for votes in the election. The Prime Minister Tsipras is promising changes that it’s left-wing party doesn’t support, while he blames Europe and the IMF for his government’s inability to reform the country. Major groups who feel humiliated after several years of austerity have been driven to extremist political choices like the Neo-Nazi Golden Dawn party. Since 2010, the Eurozone has used Greece as a scapegoat for larger structural issues within the union. But time is running out for Greece to recover, making it difficult and maybe even impossible, to remain a part of that union.