Friday, April 30, 2010

The Curse of Carabosse?

. Friday, April 30, 2010

I hope that . . . there is no malicious fairy, no Carabosse, whom [we have] overlooked and forgotten to ask to the party. For if so, the curses which that bad fairy will pronounce will, I feel sure, run as follows:--“you two brats shall grow up politicians;. . . everything you determine shall not be for its own sake or on its own merits but because of something else.”

John M. Keynes, to the inaugural meeting of the International Monetary Fund’s Executive Directors in Savannah, Georgia 1946

The EU's response to the Greek crisis highlights a dimension of international financial cooperation that has not received much attention. When we observe crises of this nature, we are accustomed to thinking about how domestic politics in the crisis country shapes its adoption of stabilization measures. Accordingly, and as Vreeland has argued convincingly, the IMF is often a useful external scapegoat that enables a government to enact measures it recognizes it must but cannot implement given strident domestic opposition.

And although the Greek crisis displays many of these characteristics, it also displays a dynamic that the existence of the IMF has largely eradicated from international financial politics--the constraints that domestic politics in creditor countries impose on the provision of financial assistance. Indeed, what one sees in the contemporary EU reminds one of how domestic politics blocked financial cooperation during the 1920s and early 1930s.

In 1931, for example, French politics blocked an international attempt to save the Credit-Anstalt (and thereby Austria) in 1931:
"The substantial loan to Austria was not made because French internal politics entered the picture. At the beginning of his political carreer French Premier Pierre Laval had styled himself a politician of the left: the Clarence Darrow of France. But by the early 1930s he was shifting to the position of a strong nationalist. He blocked the proposed international support package for Austria, insisting that if France was to contribute France had to get something out of it."
The collapse of Creditanstalt reverberated throughout Europe, precipitating crises in Germany and London.

A major part of the motivation behind the creation of the IMF was to take domestic politics out of the provision of financial assistance to governments facing such crises. I suspect, though do not know for sure, that it was Laval's decision that led Keynes 15 years later to hope that the IMF would not grow up to become a politician that made loans not for their own sake but for some other purpose. And, although one cannot say that the IMF is a non-political organization, it has effectively decoupled the provision of emergency assistance from contemporaneous domestic political decisions. It has done so by moving the locus of these financial decisions out of national politics where they become the subject of domestic dispute and into an international arena where domestic interests cannot easily block action.

And so what is so interesting and unique about the Greek crisis is that it provides a modern opportunity to observe how difficult it is to provide financial rescue packages in a world without the IMF. By providing this opportunity, it helps us understand how the financial crises of the early 1930s escalated so quickly out of control. Because this particular benefit of the IMF is not often observed, it is a benefit that is not widely appreciated.

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The Curse of Carabosse?
 
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