Mythbusting the Troika

Does 1929 ring a bell? Worldwide depression and soaring unemployment. It's what could have happened had several Member States gone bankrupt, resulting in economic and social consequences far greater than they actually experienced. The Troika programmes were a necessary remedy for years of Socialist mismanagement. Pumping money into a system that doesn't work without fixing it first would have simply postponed the problem. Now, Ireland is back on the path to growth while Portugal is enjoying the possibility of a similar 'clean exit'. While painful measures were taken in those countries by responsible EPP Governments, the reforms are paying off.

Which is why it is necessary to dispel the myths around the Troika.

The crisis is the most severe economic crisis Europe has seen since World War II. Swift and forceful action on European level was needed. There were neither legal, nor political EU instruments available for the Euro area to tackle this kind of crisis. The International Monetary Fund (IMF) was the only existing institution to cope with this type of situation, but couldn’t mobilise enough money. Since there was no appropriate legal basis in the Treaties for setting up the Troika, there was no alternative to working in an inter-governmental way.

However, the controversy surrounding the Troika also showed that decision-making procedures did not create a sufficiently large consensus. The Troika has been a necessary gap-filler, but transparency, democratic legitimacy and parliamentarian scrutiny need to be increased.

It is now clear that:

1. Without the programmes and the financial help attached to them, several Member States would have experienced a disorderly default on their debt.

2. Without the programmes, the economic and social breakdown of countries would have been far worse that what is now being observed in the readjustment phase.

3. Without the programmes, several Member States would have be forced out of the Euro area.

4. Without the programmes and the financial help, there would have been contagion through the banking system, possibly triggering a world-wide depression worse than that of 1929.

5. The programmes were successful in averting a catastrophe. In addition they laid the foundation for economic growth as well as social stabilisation, with clear signs of recovery already visible today.

The Troika was a necessary remedy for years of mismanagement

• The Troika was not the trigger of the crisis, but the cure. The Left tries to make the Troika a scapegoat to deflect from the shortcomings in their own policies.
• The origins of the crisis are very diverse and lay in the Member States themselves. The Left is wrong when trying to put all the blame for the crisis on external factors, such as the USA (Lehman Brothers) or ‘international speculators’, or ‘trade surplus countries’.
• The main causes were severe macro-economic imbalances and insufficient budgetary discipline, or, in certain cases, fundamental problems with the national banking sector.
• In most cases, it was Socialist or Communist governments that were in charge when the macroeconomic imbalances and/or the unsustainable debt built up.
• In all cases, the Left governments waited too long before they asked for financial assistance, especially the Communist government in Cyprus (where Russian money not linked to conditionality prolonged the agony by another two years), thus increasing the economic and social costs of re-alignment. The Left’s policies have increased the suffering of citizens.

Its legitimacy

• The Troika’s work, although formally outside Community law, was legitimised through the 2-pack, the European Stability Mechanism (ESM) Treaty and the Pringle case brought to the European Court of Justice (ECJ).
• The Troika is acting on request of the Eurogroup, which is politically responsible for the decisions taken. The Troika does not take decisions, but the Eurogroup does.
• The Member States of the programme countries participate in the decisions, both when negotiating the Memorandum of Understanding, and when it comes to approving them in the Eurogroup.
• The democratic accountability is insured at national level. In addition, there was voluntary information given by Troika members to the EP about the background and the proceedings, both in written form and in hearings.
• The IMF’s democratic accountability is insured through the reporting to the 188 states which are part of the Fund.
• The 2-pack, the ESM Treaty, and the ECJ in its Pringle case suggest that the ESM and the Troika should be integrated into the Community framework.
• Concerning the Troika, the 2-pack demands that the EP is given rights of democratic accountability in addition to that already exercised at national level.
• National ownership is the most important key to the success of an adjustment programme. This is best demonstrated in countries which were determined in their adjustment, such as Latvia, Spain, Ireland and Portugal. In most of these countries, EPP governments were in charge. When not in charge, they nevertheless supported the adjustment policies. Under Prime Minister Samaras, Greece immensely increased ownership, which led to substantial improvements.

Its economic rationale

• This was the biggest salvage operation ever, both in financial terms and in the length of the programmes. The IMF’s participation was necessary, but its finances were not sufficient. European funds such as the ESM needed to be created in order to supplement the IMF.
• There is a direct relationship between the speed of adjustment and the amount of financial assistance that can be made available. If more time to adapt is given, then more money needs to be collected. The EU went to the maximum that was economically and politically feasible. When the worst of the crisis was over, some easing of the conditions became possible.
• The programme countries are experiencing a J-curve: when starting the programmes, the adjustment first drives down most economic indicators, then, after structural reforms, increased competitiveness, and the return of confidence on the capital markets followed by debt reduction, the upswing comes.
• The field where least improvements are seen today is employment. This is due to the fact that employment is always lagging: in a downturn, employment is the last to decrease, and in an upswing, employment is always last to pick up.
• It is to be expected that most countries that participated in the programme will become tomorrow’s economic powerhouses. This is best demonstrated by Latvia, which now has the highest growth rate in the EU. Spain is another country to watch for economic lift-off.
• The Left is trying to create a myth around the European Central Bank (ECB), saying that it alone saved the situation by injecting money. The Left’s aim is to pretend that the Troika’s insistence on structural reforms and sustainable public finances was useless and detrimental. The ECB insists that all these actions were necessary and coordinated, and that the ECB could only act AFTER structural reforms were initiated and deficits reduced.

Its evolution

• The Troika members may have started with different concepts but have ended up with a common approach. The initial divergences neither impacted on the quality of their work, nor on the goals.
• The urgency of the matter (avoiding a disorderly default after Socialist/Communist governments had delayed corrective measures) led to a situation where no alternative solutions to strong fiscal readjustment were available. In circumstances where countries are on the brink of default, the adjustment is very painful. Restructuring always starts with a harsh reduction of expenditure. Waiting for growth (as the Left advocates) takes too long, and would probably not work without structural reforms anyway.
• The fact that the initial planning and timetables of the Troika, such as reflected in the first Memoranda of Understanding (MoU), had to be revised isn’t due to mistakes of the Troika. Revisions were necessary because the statistics were re-assessed (in the case of Greece), the world economy went into a downturn, the national ownership wasn’t convincing (Greece again, at the beginning of the programme), and the cumulative effects of the crisis in several Member States took its toll, leading to the fear of a worldwide melt-down of the banking system and economy. The MoUs are routinely being revised on a three monthly basis. In view of the urgency of the matter at the beginning of the programmes, little time was left to fine-tune the first version of programmes.
• The biggest macroeconomic imbalance was due to a mismatch between wages and productivity. In several countries (especially Portugal and Greece), wages increased much more than productivity could rise. (By comparison: in Germany, wages also increased more than productivity, but only by a small margin.) This led to debt-financed consumption, whilst competitiveness was falling. In other words: the accumulated bills couldn’t be paid anymore. This is a lesson the Left will never learn: excessive wage increases can lead to an economic catastrophe, and correcting this will see income and pension slashed, workers fired, and the individual’s plans for the future trashed. Then comes the moment the Left starts using scapegoats such as the Troika to deflect the attention from its own failures.
• Surplus countries are not responsible for trade deficits in other countries. In an open economy of more than 180 countries, there are no strict bilateral trade relations.
• An early restructuring of Greek debt was not possible, as an extremely strong repercussion on the worldwide banking system was feared.

Signs of recovery

• It is important to avoid this kind of crisis in the future. Therefore crucial work has been done, which includes the 6-pack and 2-pack, the Fiscal Compact (Treaty on Convergence, Stability and Growth - TCSG), and the Banking Union.
• The signs of recovery in the programme countries are the following: reduced trade deficits and even trade surpluses, increased competitiveness, growth, primary surpluses (budgetary surplus when not taking into account the costs associated to the debt), renewed access to the capital markets, increase in foreign direct investment.
• The programmes were not in contradiction with Lisbon goals or the proceedings of the European Semester. Programmes were urgency measures. As they were minimising the impact of the crisis (as compared to a disorderly default) and the structural reforms will help attain the Lisbon goals in the future, the programmes are in line with the Lisbon goals.
• Once countries are out of the programmes, they will be reintegrated into the normal proceedings of the European Semester.