This paper analyzes strategies and policy conditionality of the troika – European Commission, European Central Bank, and IMF – in resolving the euro area crisis from Asia's perspective with the 1997 IMF Asian crisis management as a possible counterfactual and a yard stick for their effectiveness. The IMF entered into collaboration with the EU mainly to provide the technical expertise in and share with its European partners the lessons it learned from managing past crises. But many of these lessons have been unheeded – in particular limitations of the export-led recovery through internal devaluation and the need to move forward with financial reform at an early stage of the crisis and calibrate supply side reform with the implementation capacity of the crisis countries.
Policy Implications
- Internal devaluation driven by austerity coupled with supply side reform cannot be an effective measure for adjusting balance of payment imbalances within a monetary union. Euro area policy makers need to develop a more comprehensive adjustment strategy, which may eventually lead to creation of a fiscal union.
- As long as euro area policy makers continue to delay reforming institutional and structural impediments blocking financial restructuring, there is the risk that some of the euro area countries with large volumes of non-performing loans may develop into epicenters of another round of financial crisis.
- Imposition of a long list of structural reforms irrespective of the ability and will of a country could be self-defeating in a crisis situation. Structural reforms fail to produce the intended effects, unless they are calibrated for implementation difficulties, equitable distribution of their costs and social and political opposition.
Image Credit: Raúl Hernández González Via flickr (CC BY 2.0)