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reflections

Nov 14, 2012 | 08:08 GMT

Hints of Disunity Among Greece's International Lenders

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

In an unprecedented show of disunity Tuesday, International Monetary Fund head Christine Lagarde clashed publicly with Luxembourg Prime Minister Jean-Claude Juncker, the chair of the Eurogroup of finance ministers, over plans for handling Greece's financial woes. While the European Union is making little progress toward resolving its internal disagreements, negotiations with outside institutions such as the IMF will prove even more complicated since such players have interests that extend beyond the preservation of Europe's status quo.

What is a Geopolitical Diary? George Friedman explains.

The disagreement played out during a late-night news conference held by the two leaders, after Juncker said that the deadline for Greece to lower its national debt to 120 percent of gross domestic product had been extended by two years, to 2022. Lagarde refuted the announcement, reiterating the IMF's belief that 2020 is appropriate, while acknowledging that the two institutions view the matter differently. As a result of the disagreement, the decision to disburse Greece's next loan tranche of 31.5 billion euros (roughly $40 billion) will likely be delayed another week.

Greece's multiple bailout programs are coordinated by three separate entities: the European Commission, the European Central Bank and the International Monetary Fund. Collectively known as the troika, each of these organizations has a distinct agenda. The Commission represents the political and economic interests of the European Union, but it is composed of representatives from all 27 EU member states, each in pursuit of its own national interests. The European Central Bank is the economic authority for the 17 eurozone countries, including Greece. The IMF is the only branch of the troika that has interests and a mandate that are not wholly European in nature. Its main concern is to maintain global macroeconomic stability, well beyond the fate of Europe itself.

Nevertheless, the IMF likewise consists of member countries; the United States and Japan are its two largest contributors, and China will be third after the implementation of recent IMF quota reforms. Member countries expect the organization to be effective, and they certainly have less of an interest in preserving European political unity — especially if the European consumer market can be mostly preserved anyway.

Despite some tensions, the IMF has acted largely in lockstep with the Europeans since the beginning of the crisis — a course that was not as complicated as it would have been for other non-European organizations since the IMF is not beholden to a domestic political constituency. Until this year, the reluctance of various EU member states was usually what brought about delays in disbursing Greece's loan tranches. The past two loan installments, however, stalled due to IMF objections. While the IMF does not have the same sort of domestic concerns as other international institutions, it faces constraints just like any other geopolitical actor.

Since little progress has been made as Europe's crisis enters its fifth year, the IMF is currently facing questions of credibility. In 2010, the troika designed Greece's original bailout agreements with the assumption that the country would return to positive economic growth by 2012. But in its recently released annual World Economic Outlook, the IMF forecasts that the Greek economy will contract by more than 6 percent in 2012. This acknowledgement of the inaccuracy of its own economic forecasts already makes the organization appear less competent. By agreeing once again to revise Greece's debt targets, the IMF would appear impotent.

If the IMF is indeed willing to take a harder line with Europe than it did a year ago, allowing the eurozone to inch closer to the brink, a new dynamic could be emerging. Is the IMF losing confidence that a united Europe can emerge from the crisis? Is international opinion consolidating around the idea that Europe may no longer be the economic hub a decade from now that it is today? After all, transpacific trade surpassed transatlantic trade in volume decades ago.

More often than not, events such as a disagreement between the IMF and the EU are marginal events from which it would be imprudent to draw dramatic conclusions. However, careful examination of seemingly marginal events is key to detecting emerging trends. And the IMF's departure from the European consensus — even over a relatively minor matter — could indicate a non-trivial decline in the importance of a united Europe to the world economy.

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