Wednesday, July 21, 2010

Hungary and the IMF

I made a guest appearance on The Monkey Cage, along with Grigore Pop-Elches of Princeton University, discussing Hungary and the IMF - thanks to Joshua Tucker, of my beloved alma mater, NYU.

Here's the post, as it is introduced by Joshua:

Yesterday I was somewhat surprised to read that the IMF and the EU had decided to suspend a credit line to Hungary because of concerns over the newly-elected Hungarian government’s budget plans. After all, the recent Hungarian government had come to power in dramatic fashion this spring in part to clean up Hungary’s economic mess. Did this signify a new direction in Hungarian politics, or, perhaps more importantly, a new direction for the IMF and/or the EU in dealing with issues of sovereign debt in Europe?

With these questions in mind, I emailed Grigore Pop-Elches of Princeton University (the author of From Economic Crisis to Reform: IMF Programs in Latin America and Eastern Europe and James Vreeland of Georgetown University (the author of The International Monetary Fund: Politics of Conditional Lending) for their thoughts.

Grigore offered the following observations:

1. A number of analysts claim that it’s “very rare” for the Fund to freeze funding for program countries, which suggests a pretty serious situation. While this may be true for the recent wave of IMF programs following the 2008 crisis (in which both the IMF and most debtor countries have been on their “best behavior”) it is not really a rarity in historical terms: thus, less than half of IMF programs in Eastern Europe in the 1990s were fully implemented, so these kinds of disagreements and punishments are hardly unusual. Moreover, the Fund has signaled its willingness to return to negotiations in September, which means that the program has not completely gone off track. The problem is that Fidesz in unlikely to be willing to make a lot of compromises prior to the October local elections, for fear of further strengthening Jobbik.

2. What’s interesting - and rather ironic from a Hungarian perspective - is that the patterns of conflict between the Orban government and the IMF are actually quite similar to the IMF relations the Meciar government in Slovakia in the mid-1990s. In both cases, the conflicts were driven less about the broad parameters of fiscal adjustment, on which both governments were fairly close to the targets but about relatively minor populist measures - the bank tax in Hungary and the import surcharge in Slovakia - on which the two populist leaders were unwilling to compromise.

3. The other thing driving the current standoff is that ultimately Hungary’s crisis is not that critical in the short term - they still have enough reserves and decent financial market access - which gives both the government and the IMF (and the EU) room to stick to their positions without fearing an immediate meltdown. But as reserves diminish and the cost of lending goes up in the fall, the Hungarian government will have less maneuvering space and will probably be more willing to compromise. On the other hand, if things get bad enough, the EU may decide that one of the lessons from Greece is that earlier intervention is cheaper in the long run, which could soften their own demands for additional fiscal austerity.

James wrote:

The International Monetary Fund has returned to its roots: lending to Europe. Some have suggested that the European Union needs its own European Monetary Fund, so that its governments do not have to turn to the IMF. But what would such an “EMF” bring? They already have the European Central Bank, with ample lending resources. The answer is “conditionality”- the quid-pro-quo of loans in return for policy reform. Right now, the IMF is playing hard ball with Hungary, whose government is not willing to implement the level of austerity recommended by the Fund. This is a warm-up for what may be coming with Greece down the road, if its government decides it can’t live up to the budget cuts required in its IMF arrangement (see here). And you can bet that politicians in Italy, Spain, and Portugal are paying attention to see just how strict (or not) the IMF will be. Ultimately, most of the loans and prospective loans for these countries come from other European governments - mainly France and Germany. It is in their interests to keep these countries afloat — major exporters to the European countries in trouble are surely pressuring their governments to lend. But they also have concerns about inflation and moral hazard. For a generation, the German Bundesbank towed the hardline, and the German government - urged by inflation-averse voters - continues to crack the whip. But as Europe has moved into a new phase with the Eurozone, it may be more politically palatable for the rest of the EU to launder these ugly politics through another international institution. That’s what the IMF is doing - the IMF can be the bad guy - forcing governments to make tough choices. The IMF provides an institutionalize mechanism by which liquidity is provided in return for policy reform. Compliance is not always forthcoming, especially with strategically important or politically powerful countries, but for countries like Hungary and Greece, conditionality can have a real impact.

Some further Vreelander thoughts:

It will be interesting to see how far the Managing Director of the IMF, Dominique Strauss-Kahn, will want to push austerity. He is from the Socialist Party in France and may have aspirations to run for president (for a discussion of this and of his performance at the IMF, in French, see here). He's not a big austerity guy. So, Germany may have a reluctant whip-cracker. Still, I think the IMF Executive Board preferences will prevail. And when it comes to Europe, I suspect that Germany will hold sway in those behind-closed-door meetings.

As for the "bad guy" link above, it amuses me because it casts the IMF as the "Batman," Germany as "Alfred" (or "Gotham City," if you will), and Hungary/Greece/Italy/Spain/Portugal as the "Joker." A disclaimer: while a lifelong fan of Batman fiction, I neither condemn nor condone the IMF - I am a neutral observer in real-life.

IMF: People are dying. What would you have me do?

Germany: Endure. You can be the outcast. You can make the choice that no one else will face: the right choice. [Europe] needs you.

Greece (to Germany): A little fight in you. I like that.

IMF: Then you're gonna love me.

Germany: Now that's more like it, Mr. [Strauss-Kahn].

Hungary: It's all part of the plan.

IMF: Com'on!

Hungary: Hit me!

Spain & Greece: Let's put a smile on that face...

(To see it all 1960's style, click here.)

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