Greece and the Eurozone Crisis

On March 3, Paul Blustein, a senior fellow at the Centre for Governance Innovation in Waterloo, ON, gave a lecture on the Eurozone crisis that unraveled in the early 2010s. With approximately 25 people in attendance, he presented the key details from his new book, Laid Low, which chronicles the crisis from the perspective of the International Monetary Fund (IMF). In the aftermath of Dominique Strauss-Kahn’s resignation following his arrest in a New York City hotel, the IMF was already sapped of credibility. This scandal showed globalization’s treacherous side, revealing that even advanced European countries needed bailouts and that a stronger IMF was essential to helping prevent what happened.

During the Greek debt crisis that resulted from the 2007-08 global recession, for example, its debt to GDP ratio was 115%, resulting in the country requiring more money than what the IMF could provide. The crisis was to be solved by a troika consisting of the European Commission, European Central Bank, and the International Monetary Fund, with the IMF acting as a junior partner. Two plans were considered to relieve the debt crisis in Greece: Plan A involved loans and austerity measures, while Plan B, a debt restructuring, required debt to be sustainable “with high probability.” Because of strong backlash against Plan B, the troika carried out Plan A, despite skepticism from the IMF. Nevertheless, Plan A went awry and required a second rescue of the Greek government in 2012. It became clear that the IMF had more leverage at this time than at the beginning of the crisis. Because of this crisis, the IMF suffered a big blow to its credibility and long-standing future.

Blustein’s lecture ended with a brief question and answer session where he brought up reasons why Plan A worked for Latvia in 2008 and not Greece in 2011, as the country saw induction into the EU as an escape route from its neighbor, Russia. He also hypothesized about the IMF’s shift to having more leverage in Europe and concluded that, overall, the IMF’s beginning weakness was that Dominique Strauss-Kahn, who wanted to become President of France, was not tough because he tried to appeal to everyone. The IMF’s leverage thus increased with Christine Lagarde, the new director of the IMF since 2011.