Stephen Jaffe/International Monetary Fund
Sir, Larry Summers bases his call for a greater International Monetary Fund role in resolving the European financial crisis on the view that the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations (“Time to turn to the IMF to rescue the eurozone”, December 9).
To support his view, he cites the IMF’s experience in dealing with economic crises ranging from the problems of the UK and Italy in the 1970s, to the Latin American debt crisis of the 1980s, and to the Mexican, Asian, and Russian financial crises of the 1990s.
It appears to have escaped Professor Summers’ notice that in virtually all of the IMF programmes that he cites the IMF was supporting adjustment programmes that involved major devaluations or depreciations of the currency. And it did so in cases where the internal and external imbalances as a percentage of gross domestic product were but a fraction of those in the European periphery.
This would suggest that if the IMF truly did not allow the laws of economics to give way to politics, debt write-downs and euro exits for the European peripheral countries would now have to be on the table.
One also has to be surprised at Prof Summers’ great faith in the IMF’s judgment considering its recent highly unfortunate experience with its Greek programme, which is by far the IMF’s largest lending operation in its entire history. In going along in May 2010 with the European charade that Greece did not have a solvency problem, was the IMF really standing for the proposition that the laws of economics do not and will not give way to political considerations?
Desmond Lachman is a resident fellow at AEI