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.

The imposing of constraints on capital flows in emerging economies

“…The ensuing adoption of a large part of the EU approach once again perhaps unintentionally reinstates the WC framework on IMF policies. This demonstrates that the IMF has changed only incrementally as it evolves, as it is embedded in a social environment that facilitates some options while constraining others (Lutz and Kranke, 2010). The 2008 GFC also triggered perhaps another unintended consequence when emerging economies emerge as lenders to the IMF on two occasions, and with some others effectively employing capital controls without condemnation as faced by Malaysia during the 1997 AFC.…”