Shouting into the Wind: What the IMF can do to Fix Europe's Slowed Economies
When the International Monetary Fund (IMF) and World Bank met at their annual meeting from October 12-18 in Thailand, the IMF’s message to wealthy countries was blunt: the world’s economies are on track for their biggest budget deficits since the COVID-19 pandemic, and advanced economies are the worst offenders. Regardless, the warning seemed to fall on deaf ears as Kristalina Georgieva, IMF Managing Director and Chair of the Executive Board, stated that she saw “no decisive action” from the most indebted countries.
Across Europe, large-scale economies like those of Spain, France, and the U.K. have faced slowing economies due to various factors including the ongoing Iran War blockage of the Strait of Hormuz, slowed adoption and innovation of AI, and rising debt to GDP ratios. In particular, France is struggling with borrowing costs reaching a 24-year high. The IMF advised the U.K. to remain on course despite its slower-than-usual economic growth, while economists forecast Spain's growth at 2.1 percent, down from 2.8 percent last year.
In lieu of the slowed economy, France is facing nationwide protests, resulting in damages totaling in the hundreds of millions of euros. Protests over crumbling school infrastructure broke out in mid-September and have only persisted. The protests are about schools, not budgets, but the two are linked, because as France continues to spend more to pay off the interest from their growing debt, less money is left for repairing the school system.
But can the IMF actually force France or other wealth economies to actually do anything about their rising debts? The short answer is no, but the longer answer is a bit more complicated.
Delegates at the 1944 Bretton Woods Conference created the IMF to prevent currency wars and economic upheaval caused by the Great Depression. In their plan, the IMF would be funded by its own members, with each country paying a “quota” depending on their economic size, with more powerful countries receiving more voting power and the right to borrow more. The running theory is that by keeping exchange rates and payments stable between nations, further trade would be encouraged, making states bound together by trade and more open to cooperation rather than conflict.
Since then, the IMF has solved multiple economic crises. In the early 2010s, Greece faced a sovereign debt crisis as a result of chronic overspending and widespread corruption. In response, the IMF intervened by issuing multiple bailout agreements, a move that kept Greece from defaulting on its immediate, orderly debt. During the COVID-19 pandemic, the IMF again stepped in to assist its member nations, providing nearly $400 billion to roughly 100 countries to help ease the blow of the pandemic.
Despite a track record of assistance, countries like France, the U.K., and Spain now find themselves in a different situation that the IMF cannot solve for them. For a national government to borrow money, they must first agree to the IMF’s conditions, such as raising taxes or cutting public spending. For instance, in Greece, the IMF set strict spending cuts and reforms attached to the loans it gave to the country. Additionally, during COVID-19, the IMF moved more efficiently to address the rapidly progressing public health crisis, weakening its conditions for loans and sending out emergency loans paid out in a single installment, without the usual list of required reforms. In practice, however, the quid pro quo remains the same: a country in need must comply with the conditions of the IMF.
Regarding the advanced present-day economies of France, the U.K., and Spain, none are borrowing from the institution. Instead they’re borrowing from private investors, so the IMF cannot enforce any term conditions. Without leverage, the IMF lacks concrete authority aside from monitoring these economies and offering published advice as it did in Bangkok.
There are multiple pathways for the IMF to exert indirect influence. By publishing reports, the IMF can flag whether it thinks a government’s finances are on a sustainable path, information that investors use to understand how risky a government’s borrowing is. A country that blatantly ignores the IMF’s recommendations may find that it costs more to borrow, which gives the advice indirect weight that the IMF cannot itself enforce.
The IMF’s warning in Bangkok shows both its reach and its limits. While it can name the problem and ask for change, it cannot force advanced economies to fix the issue. The real power is in the hands of investors and voters who, despite having to share power, pull governments in opposite directions. In France, the market wants a smaller deficit, which only comes from spending less or taxing more. Yet, the students in the streets want more spending. The way France and its fellow advanced economies choose to tackle this issue, and whether or not to heed the advice of the IMF will determine whether this economic slowdown can turn around, or if this backslide turns into something worse.