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The dog that did not bark: An ex-post evaluation of IMF surveillance of the Eurozone

Europe’s surveillance of its highly-indebted countries has come under strong criticism. But these countries were also under the watch of another institution, the IMF. This column presents a report showing that the Fund is hardly without fault itself.

The Eurozone crisis has exposed deep governance deficiencies at two separate levels.

  • One, highlighted by the recent chain of events, is crisis management and resolution.
  • Two, no less important, concerns crisis prevention.

Although European surveillance mechanisms were in place before the crisis – and academics pointed out the key flaws far in advance – the EU surveillance mechanisms missed the signs.1 They failed to detect, let alone prevent, the build-up of vulnerabilities beyond sustainable levels, even in the area of public finances which was their main focus.

But crisis prevention in, and surveillance of, the Eurozone (EZ) was not only the responsibility of European authorities. As members of the International Monetary Fund, all individual EZ countries are also subject to regular bilateral IMF surveillance conducted under Article IV of the IMF’s Articles of Agreement. In addition, although not an IMF member, the currency union as such is subject to regular IMF surveillance.

In a recently published report undertaken for the IMF (Pisani-Ferry et al. 2011), we provide an evaluation of IMF surveillance of the Eurozone in the years before, and during the first phase of, the global financial crisis. Previous work, in particular the report of the Independent Evaluation Office, has already uncovered significant shortcomings of IMF surveillance (Bossone 2011). Our report adds to this debate by focusing on the Eurozone as a whole and on four countries severely hit by the recent economic and financial crisis, namely Greece, Ireland, Portugal, and Spain.

A first issue is the institutional and economic framework of EZ surveillance by the IMF and the difficulties it creates. We have to acknowledge that the organisation of the Eurozone made surveillance by the IMF particularly difficult. With no common external representation (and no IMF membership) and an internal economic governance at three different levels (national, EZ, and EU), the Eurozone is a complex entity. Regular IMF surveillance, conducted through Article IV reports, therefore involves a Eurozone report addressing EZ and EU policies, and individual EZ country reports covering national policies. On the economic side, surveillance is made difficult by the traditional focus of IMF surveillance on nominal exchange rates as the main channel through which external stability, the ultimate goal of surveillance, can be endangered. External instability is an appropriate concept, but the focus on exchange rates distracted attention from other channels through which developments in some EZ countries contributed to instability.

As far as the period before the crisis is concerned, we find that:

  • The IMF issued a number of strong and relevant policy recommendations, whose follow-up was unfortunately not always ensured.
  • In general, IMF surveillance was process-driven rather than analysis-driven, with insufficient integration between national and EZ-wide analyses and recommendations. As a result, it often failed to identify spillovers between EZ countries.
  • Rather than fully exploiting its comparative advantage based on its international experience in crises-prone countries, the IMF fell victim to a “Europe is different” mindset and failed to address issues such as divergence in unit labour costs, capital flows and the resulting large country-level current-account imbalances. Eagerness to play a role in the complex European policy process reduced the IMF’s effectiveness as an independent and critical observer of the EZ. Vulnerabilities that proved to be problematic after the crisis erupted were not always spotted beforehand. When they were, the Fund often failed to keep focus on them and to press forcefully for policy responses.
  • In general, IMF surveillance failed to take fully into account the implications of being in a currency union, both for national policies and for the governance of the Eurozone, whose weaknesses were not fundamentally criticised. However, the Fund correctly identified some weaknesses of the European integration process, most notably of the EU financial supervision and resolution framework.

After the Lehman shock, IMF surveillance became much more intensive, with a more real-time and less formalised approach complementing Article IV reports. We find that:

  • Regular surveillance became more relevant (although it continued to suffer some weaknesses, in particular as regards the division between EZ-wide and national Article IV reports).
  • The IMF provided advice to national and EZ authorities at an accelerated pace as the crisis unfolded, quickly recognising the nature and magnitude of the problems facing the Eurozone and abandoning earlier complacency.
  • The Fund rightly assessed the magnitude of the economic downturn and urged for a strong macroeconomic response. However, it did not sufficiently differentiate the advice for fiscal stimulus across countries, thereby contributing to later vulnerabilities, in particular in Spain.
  • The Fund advocated early on a vigorous response to deal with distressed banks. This was a positive contribution to the European debate that was slow to accept the issue.
  • The Fund was an important contributor in the search for a crisis management and resolution framework, pushing for more comprehensive and bolder solutions.
  • In the debate on the reform of the governance of EMU, the Fund contributed on some issues but was not a major contributor to the rethink of the European policy framework.
  • The report makes a number of recommendations to improve IMF surveillance in the EZ:
  • The IMF surveillance mandate for currency unions needs to be re-interpreted so as to recognise that instability in a currency union involves channels other than the nominal exchange rate, the normal channel in surveillance of IMF members. A revision of the 2007 decision on surveillance would help in this respect, but there is room for improvement within the existing legal framework.
  • The IMF’s relationship with the EZ should be redefined. The Fund should take notice of the EU’s institutional constraints, but should not be bound by them. Although it is not likely to go down this route in the short run, given the need for assistance by Eurozone countries, it should gradually give up the role of a major player in the EZ institutional game adopted at the height of the sovereign debt crisis and revert to its normal role of trusted external advisor, including on EZ institutional reforms.
  • IMF surveillance should be restructured in order to improve the consistency of national and EZ-wide surveillance and to ensure better effectiveness. In particular, the EZ Article IV report should be done away with and replaced by a Eurozone Surveillance Report (EZSR), combining the main results of the national Article IV reports and of the EZ mission. It should address all major intra-EZ spillovers and examine linkages between the EZ and the rest of the world.
  • The Eurozone Surveillance Report would be an important vector to ensure better traction for IMF advice to the EZ and its member countries.
  • Financial-sector surveillance and risk assessment should feature prominently in national Article IV reports and in the Eurozone Surveillance Report.

There was no shortage of watchdogs exercising surveillance of the Eurozone. Alas, little barking was heard in the run-up to the crisis. On the basis of its wealth of experience gathered from crises the world over, and using its distance from Brussels, the IMF should have had relative freedom from institutional constraints and European groupthink mentality and could have been expected to spot individual vulnerabilities and cross-country spillovers better than national governments or European institutions. Hardly. The lessons from this failure should be drawn out in full.


Biagio Bossone (2011), “At the shrink’s bed: The IMF, the global crisis and the Independent Evaluation Office report”, VoxEU.org, 11 February.

De Grauwe, Paul (2009), “Greece: The start of a systemic crisis of the Eurozone?”, VoxEU.org, 15 December.

Eichengreen, Barry (2007), “Eurozone breakup would trigger the mother of all financial crises”, VoxEU.org, 17 November.

Eichengreen, Barry (2009), “Was the euro a mistake?”, VoxEU.org, 20 January.

Eichengreen, Barry (2010), “It is not too late for Europe”, VoxEU.org, 7 May.

Pisani-Ferry, Jean, André Sapir, and Guntram B Wolff (2011), “An evaluation of IMF surveillance of the euro area”, Bruegel.org, 31 October.

Reinhart, Carmen (2008), “Eight hundred years of financial folly”, VoxEU.org, 5 May.

Reinhart, Carmen (2009), “The economic and fiscal consequences of financial crises”, VoxEU.org, 26 January.

Reinhart, Carmen (2010), “From financial crash to debt crisis”, Vox Talks with Romesh Vaitilingam, VoxEU.org, 9 April.

Reinhart, Carmen and Kenneth Rogoff (2008), “This Time its Different: A Panoramic View of Eight Centuries of Financial Crises”, NBER Working Paper 13882, March.

Wyplosz, Charles (2009), “Greece: The party is over”, VoxEU.org, 14 December.

Wyplosz, Charles (2010a), “The Eurozone debt crisis: Facts and myths”, VoxEU.org, 9 February.

Wyplosz, Charles (2010b), “And now? A dark scenario”, VoxEU.org, 3 May.

Wyplosz, Charles (2010c), “European Stabilisation Mechanism: Promises, realities and principles”, VoxEU.org, 12 May.

1 On this site, Carmen Reinhart posted three warnings (2008, 2009, 2010). Barry Eichengreen added specificity in January 2009 with “Was the euro a mistake?”. Charles Wyplosz and Paul De Grauwe also gave early warnings, both in December 2009.

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