Troika under scrutiny: European Parliament joins CSOs

3 February 2014 by Bodo Ellmers

The times when the Troika of the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) could operate in the dark and on extralegal grounds seem almost over. The European Parliament just released its draft enquiry report on the role and operations of the Troika with regard to the euro area progamme countries. The report criticises the “generally weak accountability” of the Troika and the “lack of transparency” in negotiations with programme countries. The Parliament points out that there was no appropriate legal basis for setting up the Troika, and that the programme conditions did not pay respect to the Charter of Fundamental Rights of the European Union.

This report – welcomed by Eurodad - complements recent civil society initiatives to hold the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

to account, for instance Troika Watch.

Limited accountability and transparency

The draft report is largely based on questionnaires that were sent out to the Troika institutions, to additional EU institutions such as the European Council and the Eurogroup, and to finance ministries and central banks of the four programme countries (Cyprus, Greece, Ireland, and Portugal).

The chosen methodology immediately unveiled accountability deficits: according to information obtained by the newspaper Handelsblatt, the IMF refused to fill it in, saying they are on principle not publicly accountable to parliaments. Similarly, Herman Van Rompuy responded that “As President of the European Council, I am not involved” – a finding in its own right as the Council represents the member states in the EU. The Eurogroup’s president Jeroen Dijsselbloem partially responded, saying “these [Troika] institutions and the programme countries themselves are best placed to answer many of your specific questions”. The European Commission and ECB in turn passed the buck to the Eurogroup, with the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
commenting: “In terms of specific measures for specific countries, it would be more appropriate for the Eurogroup to respond.”

Troika conditionality - whose ownership?

A key area of concern for the European Parliament – as well as for many citizens – is who designed the conditions attached to the Troika’s financial assistance. These conditions went far beyond macroeconomic factors. The Parliament’s report points out that the programmes contained detailed conditions on social affairs such as “detailed prescriptions for health systems reform and expenditure cuts” in Greece, Ireland and Portugal. It explicitly “regrets that the programmes are not bound by the Charter of Fundamental Rights of the European Union and the Treaties”.

Economic conditions such as those imposed on Greece have contributed to the desolate state of its economy. The Greek finance minister reports in his response that unemployment is at record highs, GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
has dropped by 25%, and consequently the debt to GDP ratio turned out to be higher than anticipated in the adjustment models.

The bank bail-out conditionality imposed by the Troika on Ireland could also have repercussions. According to the – quite diplomatic - response of the Irish finance minister, 30% of the existing Irish debt ratio of 120% of GDP is due to the bank bail-outs. He writes that “the option now being seen at a European level – bailing-in the senior bondholders – was not available to the Irish authorities”, indicating that the Irish taxpayer was forced to pay the bill for their collapsed banking system. Crucially, the Irish Finance Minister adds that “I understand that the previous government sought to include senior bondholders in resolving banks in wind down … but this was prevented by the Troika”. The responses by the Commission and ECB confirm that avoiding contagion and spillovers to the rest of the Eurozone was one of the key factors that guided programme design and conditionality. This ensured that citizens in crisis countries paid a huge price for protecting Europe’s highly leveraged and overexposed banks.

On the crucial ownership issue, the Commission’s response is that “the ownership of the design of the programme belongs to the authorities of the Member State concerned”. The ECB seconds that “the respective government has ownership of, and responsibility for commitments, including all specific measures.” But the Member States concerned report that their policy space was limited. The Greek finance minister states that “Given the inability of Greece to access capital markets, its bargaining power was de facto weak.” This is a dilemma which is well known from adjustment programmes in crisis-affected developing countries, where it is usually the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
staff that determines the conditionalities, as previous Eurodad research pointed out.

The Troika - Legal or not?

The report confirms that “there was no appropriate legal basis for setting up the Troika on the basis of European primary law”. This is indirectly confirmed by the Commission when it writes that the “Troika model has been endorsed by the EU legislator (see Article 7 of Regulation (EU) N° 472/2013)”, which implies that before 2013 there was no such endorsement. All Troika programs except for Cyprus had been developed before that date.

The recommendations include making the Commission representatives in the Troika report regularly to the Parliament and amending Memoranda of Understandings with programme countries to include appropriate democratic accountability. However, the report does not specify what real accountability would mean in practice, and what concrete steps to take. The only reference in the paper to citizen participation beyond parliaments is the call to involve the “social partners” in decision-making processes on adjustment programs, a clear concession to European trade unions, but also to influential business associations in Europe.

A weakness is that – while acknowledging that the EU was unprepared for a larger sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis – it omits to demand urgently needed debt cancellation or a process to achieve that, such as a statutory insolvency regime. Other currency unions’ legislation, namely in the USA, provides a regime that makes an orderly debt workout for sub-union political entities possible. Instead, the Parliament just recommends to give the European Stability Mechanism ESM
European Stability Mechanism
The European Stability Mechanism is a European entity for managing the financial crisis in the Eurozone. In 2012, it replaced the European Financial Stability Facility and the European Financial Stabilisation Mechanism, which had been implemented in response to the public-debt crisis in the Eurozone. It concerns only EU member States that are part of the Eurozone. If there is a threat to the stability of the Eurozone, this European financial institution is supposed to grant financial ‘assistance’ (loans) to a country or countries in difficulty. There are strict conditions to this assistance.
the mandate to provide precautionary assistance, which would expand its menu of options to provide fresh liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. to member states. This might be counter-productive in cases of clear insolvency of a Eurozone Member State - the insolvency regime remains a governance gap in Europe and elsewhere.

The most surprising recommendation is one that would essentially put an end to the Troika. The Parliament asks to evaluate “the mandatory involvement of the IMF in euro area financial assistance programmes” and to explore the option of creating a European Monetary Fund as an alternative to the IMF. There is, however, no reason to think that structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

managed by European institutions without the IMF would not be worse. The responses by the European institutions indicate that the well-being of the ordinary European citizen is not at the centre of their considerations when decisions are made. Citizen participation, democratic control and effective safeguards for the vulnerable remain key areas to be addressed, with or without the IMF.




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