It’s time for the IMF to step up in Europe

By Lawrence Summers
December 8, 2011

By Lawrence Summers
The opinions expressed are his own.

European leaders will meet today for yet another “historic” summit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last convened to deal with the financial crisis.

If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge.

Given that Europe is the largest single component of the global economy, the rest of the world has a stake in helping to avoid major financial accidents. It also has a stake in aiding continued growth in Europe and ensuring that the European financial system supports investment around the world – particularly as cross-border European bank lending dwarfs that of banks from any other region.

Now is also a historic juncture for the International Monetary Fund. The focus of the policy response to the crisis must now shift from Brussels and Frankfurt to the IMF’s boardroom.

From the problems of the UK and Italy in the 1970s, through the Latin American debt crisis of the 1980s, the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about the precise policy choices the fund has made in the past. But, the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of borrowed funds, but also for those whose success is systemically important for the global economy.

Christine Lagarde, the head of the IMF, highlighted the seriousness of problems in Europe to members of the international financial community assembled in Jackson Hole in August. She pointed to capital shortfalls in the European banking system and the need for adjustment to be carried on in ways that were consistent with continuing growth. Now, the IMF needs to speak and act on several fronts.

First, it is essential that Italy’s adjustment be carried out within the context of an IMF program. After European authorities emphasized that Greece was fully solvent and able to service all debts in full, it is unlikely that they, acting alone, have the capacity to reassure markets. Moreover, there are profound intra-European political problems if northern Europe either does or does not impose conditions on Italy. It would be much better to outsource those traumas to the IMF.

Second, as the IMF deals with individual European countries, it needs to recognize more than it did in the past that they are embedded within a monetary system and community of nations with an increasing number of common institutions. It would be inconceivable that the IMF would lend money to a country whose central bank was not committed to an appropriate monetary policy, or that was ignoring contingent liabilities in the banking system. IMF support for any European country should be premised on understandings with the European Central Bank that controls that country’s monetary policy.

Third, when engaging with individual members of a monetary union, the IMF cannot assess the prospects of one member of the monetary union in isolation. If some countries are to enjoy reduced trade deficits, others must face reduced surpluses. If there is no clear path to reduced surpluses there is no clear path to reduced deficits and hence to solvency. More generally, the sustainability of any program must be assessed in the context of realistic projections of the economic environment. The IMF must be careful not to approve adjustment programs that are not realistic.

Fourth, the IMF has a responsibility to speak clearly about threats to the global economy. Even if debt spreads in Europe fall and modest growth is reattained, the global economy is threatened by the large-scale deleveraging of European banks. An improvement in the fiscal position of sovereigns will help but this is insufficient. If banks are not recapped on a substantial scale soon, there will be a large contraction of credit in the global economy.

After Friday’s summit, attention will and should shift to the IMF.  It must act boldly but no one should ever forget a fundamental lesson of all past crises.  The international community can provide support but a nation or a region’s prospect for prosperity depends ultimately on its own efforts.

Photo: IMF Managing Director Christine Lagarde attends at a news conference in Tokyo.

REUTERS/Issei Kato

29 comments

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Good idea, fund the IMF, but not with my tax dollars. Those banks are big boys that thought they had the world by the tail, and now they can go broke like I did.

Posted by myownexperience | Report as abusive

When you say the IMF, you mean the american taxpayer should bail out big business and banks in Europe like we did in the USA…we don’t want those poor bond holders to lose any money.

Posted by cloftoid | Report as abusive

Once again – advice from one of the primary architects of the Keynesian debt disaster the entire world currently faces – why on earth would he be given a forum . . It’s like getting advice on a commodity account from Jon Corzine.

Posted by Hinch | Report as abusive

Not much love from anyone for these banks feeding the folks that can not repay on one side and crying foul on defaults.

Let a healthy correction happen around the globe as a lesson to these banks and eventual nationalization of a few of the big banks toward long-term stability.

Posted by Mott | Report as abusive

Everyone misses the key point. Europe is incapable of running itself where large-scale integration is concerned (they do OK running shops and markets). Christine Lagarde spent 20 years in Chicago. She can run things according to the Al Capone method of management. It will be a well-run operation.

Posted by Jim1648 | Report as abusive

Mr Summers,

You have failed to mention the basic macroeconomic conundrum which is inherent in the Eurozone framework. That is, by tying together disparate national economies with a single currency each entity loses it’s ability to manage or adjust for significant cross border capital movements. The gold standard was abandoned for precisely this reason. The Euro experiment was doomed from the very onset because there was no mechanism for addressing this most basic issue.

Posted by kithorton | Report as abusive

“There is ample room for debate about the precise policy choices the fund has made in the past. But, the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of borrowed funds, but also for those whose success is systemically important for the global economy.”

This snippet is probably the crux of this article. During the Asian financial crisis, the IMF was pilloried by the pols who took its money, but it pressed on. In a phone call with President Bill Clinton in February 1998, Indonesia’s President Suharto said that “the current IMF programme hasn’t been a roaring success”, and demanded that Washington propose an alternative to a mid-course correction suggested by Suharto, who wasn’t happy with the IMF’s medicine, “because what you’ve got here now isn’t working.” (WaPo cite, Feb 19, 1998) The IMF stood firm and few months later he was out, fairly peacefully, and after some struggles, Indonesia is one of the bright spots of the region now. Korea also came through stronger in the end and, arguably, Thailand, though they and the Philippines still wrestle with larger issues.

Some apolitical solution seems necessary in Europe and the histories of those countries don’t engender a lot of hope that they’ll come to it themselves. The answer seems to be somewhere between Krugman-like spending and cold austerity but anything is better than the muddling along Europe’s leaders have been doing all year.

Posted by WeWereWallSt | Report as abusive

Mr. Summers, thank you for this excellent article.

EU countries should fund the IMF. Money – in cash – is not the issue, especially in the North. Who will be managing it, is. A credible independent 3rd party helps.

@myownexperience: Yes, considering the dire state of the US economy – caused by tax cuts and overspending, mind you – it would be inapproriate to ask the US gov/Fed for money which they don’t have.

Posted by FBreughel1 | Report as abusive

“…the rest of the world has a stake in helping to avoid major financial accidents.”

The EU’s plight is no “accident.” It’s a direct consequence of following economic policy prescribed by “economists” who encouraged ever-greater use of debt to prop up their never-possible scheme of never-ending growth. What Summers is proposing here – lending by the IMF – is simply more of the same.

Posted by Pete_Murphy | Report as abusive

Oh PLEASE, no, Mr. Summers. Please don’t make us EVER suffer the consequences of risky decisions.

Posted by johnvos | Report as abusive

Larry you are the architect of many of the problems the world faces today. I suggest you climb back under the rock you came from and leave the world to sort out the problems you were instrumental in causing. Wasn’t the IMF set up to lend small amounts of money in a predatory way to smaller countries?

Posted by andytime | Report as abusive

I agree with Pete_Murphy that politicians favor growth over prudence. They have to get reelected every four years. And a more subtle but powerful problem is that they use GNP to measure economic well-being. But that is because the people use it too. If it is not going up, people are unhappy, or think they are, which is the same thing. A better measure would be a quality of life type thing that includes technological improvements. For example, computers get better every year but cost less, which might actually depress GNP. Trying to paddle faster just to keep up with a mirage will wreck any economic system.

But but that as it may, the Europeans have a choice between more integration or a crash (a very big crash in all probability). The IMF is the better option. Life is full of options, not necessarily perfect ones.

Posted by Jim1648 | Report as abusive

Considering the history of events and the financial crisis, why would anyone want to listen to Lawrence H. Summers?

Summers along with Greenspan and Rubin formed their own pro-business, anti-regulation support group back in the end. They let loose the wild wild west of finance. Fraud wasn’t anything to be too concerned about either.

This is the problem in America, there is no accountability and perpetrators carry on and are even rewarded. Here you have Summers writing a column. Just as you have John Yoo teaching law. No accountability in sight.

The economic teams handed down across administrations and their failures are never addressed. The damage Greenspan, Rubin and Summers did to America is immeasurable.

Summers is telling us that Americans should be on the hook for propping up a system that resembles a run away train nearing the end of its line. This man is criminal in my mind.

Posted by TheUSofA | Report as abusive

“He speaks and consults widely on economic and financial issues.”

Summers should only be speaking and consulting from jail.

“the follies of Lawrence Summers, beginning in the Clinton administration, when he pushed through the Commodity Futures Modernization Act, which opened the floodgates to all of these toxic derivatives that he, as much as anyone in the country, bears responsibility for the economic debacle. And then Obama brought him back. And I think what he has done is basically throw money at Wall Street, continue the Bush policy, and get nothing in return, particularly in the way of relief for homeowners — you know, mortgage foreclosure, a moratorium on foreclosures. And so, I think this is really good news. And, you know, I hope he’s not replaced with someone worse, but it’s hard to imagine someone worse.

And this guy has been a disaster at every position he has held. He was the Treasury Secretary under Clinton who presided over the radical deregulation of that administration, fulfilling the fantasy of the Reagan Revolution. The Republicans couldn’t pull it off. Summers and Robert Rubin, his mentor, did pull it off. And it’s been — this is the basic root cause of this meltdown.

And meanwhile, he’s being paid not only close to $600,000 by Harvard, but then he goes and consults on Wall Street. He was paid $4 million by D.E. Shaw, a hedge fund, and you’ll notice the Obama administration has not reined in hedge funds at all. And he received almost another $4 million in speaking fees. He got $135,000 from Goldman Sachs for one short speech. He got that much from Citigroup for two speeches. You know, so this guy, while he was advising Obama, he was raking it in, eight million bucks, while he’s an adviser to the candidate.

And then, for reasons that Obama will someday have to explain, he’s brought in as the key guy. It’s not Geithner. Geithner is a water carrier and was very much a subordinate in the Clinton administration to both Summers and Rubin. And they bring in Summers, and what he did is, again, follow that strategy, reassure Wall Street, don’t spook the markets, give them what they want, submit to their blackmail, and make them whole. And they continued the Bush policy with a vengeance, throwing money at Wall Street. “

Posted by TheUSofA | Report as abusive

Please good Reuters folks, don’t give Mr. Summers the time of day.

Posted by tmc | Report as abusive

The IMF has been the American tax payer.

Why should we fund European government bonds? We are told our Government cannot “afford” to keep its promises to us, and cannot “afford” to stop charging as if they will pay. Why should we tolerate our taxes going to backstop institutions that are clearly international in nature and that have zero concern for our own well being? Such folly has put us where we are.

Let the institutions who bought bad bonds lose their money. We cannot “afford” to bail them out.

Posted by txgadfly | Report as abusive

.. consulting on economic and financial issues..

Half of it is common-sense and the rest is unaccountable nonsense where the results are neither guaranteed nor correlation with accountable outcomes.

I think this community (ratings, consulting and the related) has little credibility left in the current times given the overall negative outcomes we have seen with their calls for urgeant actions and the like in the past and continued through present times.

Posted by Mott | Report as abusive

We can always count on Larry Summers to help the American wealthy class socialize its losses and privatize its gains.

In America, his main vehicle for that sleight-of-hand is the Fed, which has been quietly amassing a gigantic balance sheet of garbage debt instruments it has bought from the wealthy, making them whole again.

Now Mr. Summers wants to extend that help to the European wealthy class. In Europe, his sleight-of-hand vehicle is the IMF. His proposal enables the European wealthy to socialize their gambling losses, and privatize their gains — on our backs.

He wants the IMF to buy up the garbage debt instruments of the European wealthy class, and make them whole again.

I regret the day I voted for Obama.

Posted by AdamSmith | Report as abusive

“…the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of borrowed funds, but also for those whose success is systemically important for the global economy.”

I agree with WeWereWallStreet, that this quote is the crux of this piece of propaganda. What Summers is saying here is that the IMF and central banks are not answerable to the will of the citizens of the nations whose finances the IMF manages to gain control of. This is what Papandreau told Amy Goodman in a recent interview (paraphrasing), that the monetary managers that direct and control a nation’s fiscal & monetary destiny are international, while the nation’s politics are merely national.

Summers doesn’t give two ****s about any human beings, cultures, or children’s futures crushed by the machinations of the IMF. Summers will be far happier when the police state reigns everywhere, as it will clear up those untidy details such as people rioting over the looting of their national wealth. They did it to Greece, and Summers would love to do it to America.

“Give me control of a nation’s money supply, and I care not who makes its laws.” — Mayer Amschel Rothschild

Posted by BowMtnSpirit | Report as abusive

Larry Summers,

Judging by your track record below i think its not all that crazy of an idea for one to think that its not possible for (A) any human being to know less about economics than you and (B) that no human being has caused more damage to this country than yourself from being both greedy and generally uneducated….regardless of where you went to school or how long you went there. If you are unable to provide a postive result from your educational efforts it was all for nothing. and belive me sir your efforts were all for nothing.

source: http://en.wikipedia.org/wiki/Lawrence_Su mmers

Larry Summers on OTC derivatives trading and repelling the Glass–Steagall Act. in 1998
Heres what he said about banks being responsible
——————
“”the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.”
—————————-

Larry Summers on lifting commercial banking restrictions in 1999 “”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,”

Larry Summers in denial of his own destructive policy
—————————————-
When George Stephanopoulos asked Summers about the financial crisis in an ABC interview on March 15, 2009, Summers replied that “there are a lot of terrible things that have happened in the last eighteen months, but what’s happened at A.I.G. … the way it was not regulated, the way no one was watching … is outrageous.”
———————————-

Posted by billatl3 | Report as abusive

Is this the same Summers that was afraid of a trillion dollar bail out and instead selected a smaller bailout that was ineffective and just prolonged the mess we are in the US? Another profile in lack of courage and vision. The stamp of this administration. Half steps on everything.

Posted by ofilha | Report as abusive

So I get it, now the IMF will bail out currencies as well as developing nations. What a scam!

Posted by Intriped | Report as abusive

Certainly, the IMF does not have the resources to fix Europe on its own. And it is a serious question how much risk the IMF should permit itself to take on in respect of the euro, given the difficulties being experienced by the euro zoners themselves. Only the euro zoners have complete access to information about how far they are willing to go to save the euro. Those outside the euro (e.g., the IMF, the UK, the US) have less access to information about what the euro zoners are willing to do (except that we know that the euro zoners are having difficulty with promptness of action). That uncertainty makes it more difficult for those outside the euro zone (which includes the IMF and its financial backers) to justify taking on a lot of euro-related risk. The downside to a euro disaster is potentially a lot greater than the downside to a disaster involving a random developing nation (even one with a substantial industrial base). It is not clear that an IMF which became extremely invested in the euro could avoid being capsized if the worst-possible storm actually hit.

Posted by Bob9999 | Report as abusive

This is great know we have – Larry ‘oops we spent a trillion dollars and it didnt work I guess I better quit and get back to academia’ Summers talking about the need for more US Tax Dollars – this time to bail out another failed socialist government.
Really the gall of these people!

Posted by david4021 | Report as abusive

To: ofilha : “Is this the same Summers that was afraid of a trillion dollar bail out and instead selected a smaller bailout that was ineffective and just prolonged the mess we are in the US? Another profile in lack of courage and vision. The stamp of this administration. Half steps on everything.”

Are you kidding me, this idiot was the same one who supported wasting nearly a trillion taxpayer dollars on that failed stimulus not because it was too small but because Keynesian economics never works.

Posted by david4021 | Report as abusive

Summers is an idiot. Going back to the failed policies he foisted druing the Latin American and Mexican debt crisis. I pray he will retire and allow our children a brighter future.

Posted by warwilder | Report as abusive

Summers failed as a treasury secretary, was instrumental in deepening the 2008 recession in the Obama administration and then got himself fired as president of Harvard. If the man said the sky is blue, I’d immediately run outside to make sure it hadn’t turned green. Why anybody would listen to him except as a contrarian indicator or observe him as a negative role model is beyond me.

Posted by retired_sandman | Report as abusive

ATTENTION REUTERS

love your site! been reading for years!

HOWEVER if i see one more article by summers im going to take that as a slap in the face. im going to acknowledge that you don’t read your own articles or at the very least read the comments from your own readers.

If you did you would realize that reuters carrying a summers article does nothing but offend your readers.

Please stop posting his dribble and please tell us your not actually paying this idiot

someone please buy summers a clue

Posted by billatl3 | Report as abusive

Keynesian Economics – Failing since 1936

Posted by ato | Report as abusive