Amid the political tremors, it fell to three institutions – the European Commission, the ECB, and the IMF – to engineer, administer, and monitor aid packages, in an informal alliance dubbed the ‘troika’.
While government leaders and finance ministers took overall charge of the policy response, and the euro area rescue fund played an increasingly prominent part, the troika emerged as the public face of the crisis management – and as the target of often vehement criticism in programme countries.
The troika’s origins lay in the circumstances surrounding the ad hoc Greek loan package and the birth of the EFSF. While the Commission and IMF worked out and oversaw economic reforms, and the IMF co-financed the emergency loans, the ECB focused on banking system stability while keeping an eye on macro-critical developments.
It was natural for the Commission and ECB as EU institutions to share in the crisis management, but the idea of bringing in the IMF took some getting used to. For one thing, the Washington-based lender specialised in rehabilitating less developed economies, not the advanced economies of the euro area.
Some also feared that falling back on outside aid would represent an admission of defeat and further sap confidence in the euro. The counterargument was that euro area stability was a global concern that required global action, and the IMF’s technical expertise was universally recognised.
‘I had conversations with senior officials in the EU, notably my good friend [then ECB President] Jean-Claude Trichet, who if you remember was very outspoken about keeping the IMF out of Greece,’ recalled Lipsky, the IMF’s deputy managing director and then acting managing director during the first years of the crisis. ‘As he said, it wasn’t that he was against the IMF; he wanted the European governments to accept their responsibility.’ In Trichet’s view, the worst possible situation would have been for the Europeans to ask the IMF to do everything, so as to avoid taking on any responsibility or putting up any money themselves.
In the run-up to the crisis, Europe was already on the IMF’s radar screen. ‘Early warning’ exercises starting in September 2008 flagged the euro area as a potential trouble spot, Lipsky said. The IMF had concerns that ‘a financial crisis in one of the peripheral countries, small countries – perhaps Greece – would rapidly infect the major financial markets through commercial banks’ balance sheet exposures.’
As early as the spring of 2009, the IMF began making overtures to Ireland, remembers Kevin Cardiff, a senior Irish finance ministry official at the height of the crisis. Ireland then declined IMF assistance, for a number of reasons. One concern was that to seek IMF assistance in isolation would break ranks with the rest of the euro area. ‘We couldn’t afford to deal with the IMF and alienate the rest of Europe,’ Cardiff said. ‘We didn’t want to move ahead of European policy.’
The IMF had experience in the non-euro EU, most recently coming to the rescue of Hungary in 2008 with loans and a negotiated debt freeze from commercial banks – but that didn’t make its European welcome any warmer when problems in Greece began.
‘I was very hopeful that the message would have been learnt that a rapid and credible response was essential,’ Lipsky said. ‘Instead, as Greek markets began to collapse, the decision was taken to keep the IMF out. The Commission was going to handle the situation all by itself without any mechanism, without a backstop, and with no financial backing. It was very distressing, as it seemed a hugely high-risk strategy was being followed, when better alternatives were available readily.’
Reform programmes designed to regain market access and foster economic recovery are the IMF’s core duties, and it offers the added bonus that its refinancing is managed by central bankers and doesn’t wind up on the balance sheets of individual member states.
For the first Greek programme, the IMF brought crisis management expertise that, at the time, was in short supply at the EU level, and it provided one third of the rescue loans. The arrangement was transactional, on the expectation that the Greek rescue would be a one-off event.
‘At the beginning, the Commission was not equipped to do this job, but they learned very rapidly to do it well,’ said Wieser, former chairman of the Eurogroup Working Group.
Debate over the institutional line-up intensified when plummeting markets forced the establishment of the temporary EFSF, and European officials began thinking out loud about a permanent successor. Schäuble, then German finance minister, was initially sceptical about outsourcing some of the crisis management, but was swayed in part by doubts within Germany about the Commission’s capacity to impose adjustment programmes along the lines of the IMF’s work in Asia or Latin America.
‘My own view was that we Europeans should be able to manage this ourselves. But there were certain reservations in Germany,’ Schäuble said. ‘We came to the conclusion that it would be better if the IMF was involved. After all, people trusted the IMF – it was seen as responsible, reliable, and neutral in the way it interpreted the figures. We wanted to have the IMF on board because its expertise in helping highly indebted countries is unrivalled, and because it does not pull its punches when it comes to exposing the need for reforms in these countries.’
The US, the IMF’s largest shareholder, understood the euro area’s effort to keep things in-house. Geithner, former US Treasury secretary, said turning to outside funding sources ‘seemed to me deeply counterproductive to the strategy, which was fundamentally a lack of confidence in Europe’s ability and willingness to solve this.’ A former director of the IMF’s policy development and review department, Geithner said there was an abundance of reasons for Europe to take the lead. ‘Germany’s understandable reluctance to be the sole provider of fiscal resources was not a sufficient reason for the world to deploy resources and to limit Germany’s exposure,’ he said.
Lagarde experienced both sides of the question, as French finance minister at the outbreak of the crisis and then from mid-2011 as the IMF’s managing director. From her perspective, Europe could have contained the crisis independently, had it recognised early on what was brewing and been able to get ahead of the curve.
‘Had we taken that view and convinced [others] a year earlier, the crisis could probably have been solved amongst Europeans and the IMF might have been unnecessary,’ Lagarde said. ‘But where we were, where the markets had pushed Greece, and with the new numbers coming out almost on a monthly basis from Greece, there’s no doubt in my mind that the IMF actually helped address the issue.’
Working within the euro area meant that the Washington-based lender would need to work closely with its European partners. It was a learning experience for all involved, said David Lipton, the first deputy managing director of the IMF. Each institution had decision makers back in its base that it, in turn, would need to work with. For example, the Commission and the ECB had no previous track record with rescue programmes, ‘so there was a process of them gearing up, staffing up and getting experience, and then of course of the different partners learning how to interact with each other,’ he said.
‘It was clear that the rest of the currency zone was going to be playing an important role of support,’ Lipton added. ‘If the troika hadn’t existed we’d have had to invent it – it meant that we had to do business in a different way. It was clear that there was going to need to be a lot of consultation.’
EU policymakers took steps to enshrine the institutional arrangements in setting up the EFSF, stating in the framework agreement that it is ‘envisaged that aid from the temporary fund would be provided ‘in conjunction with the IMF’. While the European leadership couldn’t speak for the IMF, it became all the more critical to define the institutional division of labour as the discussion shifted to the permanent fund.
On the European side, the objective was to incorporate the IMF’s institutional knowledge while avoiding too many constraints on future policies. ‘There were some member states in the euro area that very much wanted the IMF to be on board,’ said Alexander den Ruijter, an ESM risk officer who was working at the Dutch finance ministry when the crisis struck. ‘At the same time they said: “If the ESM is going to be a permanent vehicle, then do we really want the IMF to be always there?” That’s a big question. Always means forever.’
Supporters made the case that the IMF would bring objectivity, a crucial selling point given splits among EU policymakers. Because of its global perspective, the IMF was seen as insulated from the kind of political trade-offs that often played a role in European economic policy.
‘The participation of the IMF has been quite instrumental in keeping us all on our toes,’ Wieser said. ‘The design and implementation of a decent adjustment programme simply needs an outside, neutral, and more or less independent institution.’
On the other hand, inviting in outside help raised the concern that the euro area would be giving up some of its autonomy. At one point, the IMF debate became a distraction. During discussions in 2011 over adding to the rescue resources, the European conversation veered towards expanding the IMF’s lending capacity, fuelling a perception that euro area leaders were unwilling to confront the crisis head-on.
As the troika took shape, the new institutional landscape wasn’t always easy to navigate. Unlike the IMF, endowed with a narrowly defined global mission, the Commission’s mandates go far beyond economic policy. It also serves as guardian of the EU treaties, initiator of EU legislation, supervisor of the EU’s foreign aid budget, steward of agriculture policy, negotiator of trade agreements, and arbiter of cross-border mergers and acquisitions – to give a far from exhaustive list.
Not all of the Commission’s responsibilities coexist smoothly. It treads a complex economic, legislative, and institutional path in applying state aid rules to some governments’ capital injections in banks, for example. And, in European policymaking, the Commission often plays a peacemaker role that sits uneasily with a duty to call out and, in some cases, impose sanctions on governments that stray from common European priorities.
Within the troika, the Commission provided economic policy oversight and in-depth analysis on fiscal issues, structural reforms, and macroeconomic imbalances as part of its daily duties. ‘We have a long and competent tradition of economic policy surveillance of the countries,’ said Rehn, the former European commissioner for economic and monetary affairs and the euro.
Enforcement, however, often runs into political barriers. Under the EU’s stability and growth pact, the Commission monitors national adherence to fiscal limits and it can call on a government to correct excessive deficits and debt. But its ability to insist – or impose sanctions if ignored – depends in large part on EU Member States’ voluntary submission to the rules. In 2005, EU governments amended the rules, after Germany and France had surpassed the limits in earlier years.
Because of that history, some member states questioned if the EU policy apparatus as it was then constituted would be able to impose sufficient discipline on programme countries. These sensitivities were a major reason why the euro area created an independent firewall, instead of entrusting the Commission with the powers to run a large crisis-fighting budget.
As a result, the Commission was always in the middle of the action, but with its authority circumscribed. In the first Greek programme, the Commission coordinated the bilateral loans that made up the Greek Loan Facility yet worked alongside the IMF.
As Wieser put it: ‘I’ve got great sympathy for this uncomfortable dual role that the Commission has been thrust into, especially in the case of Greece. It simply should not be the role of the Commission to be the sometimes punitive surveying institution, which has to ram through a programme against political opposition in a member state.’
In the end, that responsibility rested with the troika, as directed by the Eurogroup. It wasn’t long before the three institutions, yoked together by economic necessity, began to feel the political heat themselves.
 IMF (2008), ‘IMF survey: IMF agrees $15.7 billion loan to bolster Hungary's finances’, 6 November 2008. https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar110608a
 EFSF Framework Agreement (as amended with effect from the Effective Date of the Amendments), Consolidated version, p. 1, 6 July 2010. https://www.esm.europa.eu/sites/default/files/20111019_efsf_framework_agreement_en.pdf