The European rescue of the Washington Consensus? EU and IMF lending to Central and Eastern European countries

Abstract

The latest global financial crisis has allowed the International Monetary Fund (IMF) a spectacular comeback. But despite its notorious reputation as a staunch advocate of restrictive economic policies, the Fund has displayed less preference for austerity in recent crisis lending. Though widely welcomed as overdue, the IMF's shift away from what John Williamson coined the 'Washington Consensus' was met with resistance from the European Union (EU) where it concerned Central and Eastern European (CEE) countries. The situation of hard-hit Hungary, Latvia, and Romania propelled unprecedented cooperation between the IMF and the EU, in which the EU has very actively promoted orthodox measures in return for loans. We argue that this represents a European rescue of the Washington Consensus. The case of Latvia is paradigmatic for the profound disagreements between an austeritydemanding EU and a less austere IMF. The IMF's stance contradicts conventional wisdom about the organization as the guardian of economic orthodoxy. To solve this puzzle, we shed light on three complementary factors of (non)learning that have shaped the EU's relations vis-à-vis CEE borrowing countries in comparison to the IMF's: (1) a disadvantageous institutional setting; (2) vociferous creditor coalitions; (3) the precarious eurozone project.

Professional ties that bind: how normative orientations shape IMF conditionality

“…The IMF, as the junior partner contributing the smallest share of resources, has had to coordinate with these actors and work to accommodate their preferences. Among these various actors, Germany, the Commission, and the ECB have offered much stronger support of "Washington Consensus"-style policies than the IMF staff (Lütz and Kranke 2013). The IMF's lending policies in the Europe (and elsewhere) have been more flexible and, at least compared to past crises and to those policies endorsed by key actors in Europe, also less contractionary (IMF 2009;2011a; see also Edwards and Hsieh 2011;Kattel and Raudla 2013:432fn13;440;Lütz and Kranke 2013).…”

Avoiding the High Debt ‒ Low Growth Trap: Lessons for the New Member States

“…Apart from econometric studies, additional argument supporting the weaker position of emerging economies in financing their debts comes from the experience of international rescue packages (bailouts) during the crisis. Soon after the financial crisis hit Europe, three NMS, Hungary and Latvia (in late 2008) and Romania (in 2009) have applied for, and received, multilateral loans packages, which were mostly composed of loans from the IMF and the EU 9 (Lütz and Kranke, 2010). In the year of the bailout, the debt-to-GDP ratio in Hungary was below 75 percent, in Romania less than 25 percent and in Latvia even less than 20 percent.…”

The rebranding of capital controls in an era of productive incoherence

“…Even with reduced staffing the Fund still holds a monopoly position when it comes to experience in responding to financial distress in poorer countries. Moreover, the IMF's rescue was facilitated by G-20 and Eurozone leaders' decisions during the crisis [Lütz and Kranke, 2013]. Representatives at the April 2009 meeting of the G-20 gave the IMF pride of place in crisis response efforts.…”