Last Thursday, the International Monetary Fund spooked the markets and surprised the commentariat by chiding the U.K. Conservative government for fiscal irresponsibility. The shock was palpable. For the IMF to criticize the government of a major Western economy was a little like the janitor scolding the landlord for putting the building’s assessed value at risk. That sense of a reversal of the usual order of things was all the sharper because, lest we forget, it was Britain’s Tories, under Margaret Thatcher’s steely leadership, who wrote the book on fiscal probity as the bedrock of neoliberalism. The IMF spent more than four decades inflicting that orthodoxy upon hapless governments the world over.
As if in a bid to amplify the stir it knew it would make, the IMF’s communiqué went so far as to censure the British government for introducing large tax cuts (now partially canceled after the IMF intervention), because they would mainly “benefit high-income earners” and “likely increase inequality.” Tories loyal to Britain’s beleaguered new prime minister, Liz Truss; America’s feistier Republicans; international economic pundits; and even some of my comrades on the left were briefly united by a common puzzlement: Since when did the IMF oppose greater inequality? One would be hard-pressed to identify a single IMF “structural adjustment program”—ask Argentina, South Korea, Ireland, or Greece (where I was once a finance minister who had to negotiate with the IMF) about the strings attached to its loans—that had not increased inequality. Had the fund’s hard-nosed bureaucrats enjoyed a road-to-Damascus moment?
Three theories have surfaced about the IMF’s motives for opposing the U.K.’s tax cuts for the wealthy. One is that the IMF board feared that the fund would struggle to raise sufficient money were London subsequently to request a bailout. Another theory, voiced by former U.S. Treasury Secretary Larry Summers, is that the IMF now understood it ought to show evenhandedness in its dealings with countries rich and poor. “When there’s a crisis situation or policies that are manifestly irresponsible, it’s kind of natural for the IMF to take some kind of note,” Summers told the Financial Times, adding, “I don’t think the IMF should distinguish between its rich country shareholders and its emerging market shareholders.”
A third theory followed the Pauline-conversion rationale, suggesting that the IMF’s statement damning the Truss government’s giveaways to the ultra-rich could mark a sea change in the Washington-based institution. According to this view, the IMF was realizing that to save the international liberal order from the various authoritarian populists ascendant in the world—such as Donald Trump, Giorgia Meloni, Marine Le Pen, Viktor Orbán, Narendra Modi, and Jair Bolsonaro—it must shift its mission in a more social-democratic direction.
Though interesting hypotheses, none of these explanations engages with the reality to which the IMF was responding with last week’s surprising statement. The notion that London will go cap in hand for a bailout too big for the IMF to deliver is absurd. Britain is a wealthy country that borrows exclusively in a currency printed by the Bank of England. If worse came to worst, the Bank of England could raise interest rates to as much as 6 percent to stabilize sterling and the money markets. An interest rate at that level would certainly demolish the U.K.’s economic model of the past 40 years, but it would be the choice over an IMF bailout every time.
And I have firsthand experience that contradicts the theory that the IMF has only now, for the first time, decided to confront a G7 country whose policies it deems to be threatening global financial stability. In my negotiations as Greece’s finance minister with the IMF in 2015, the fund’s top officials were openly scathing about the German government’s rejection of a full restructure plan for Greece’s public debt; they accused Berlin of undermining Europe’s, and by extension the world’s, financial stability.
A year later, in a telephone conversation among senior IMF staff published by WikiLeaks, its European chief told a colleague that the IMF should confront the German chancellor and say, “Mrs. Merkel, you face a question. You have to think about what is more costly: to go ahead without the IMF … or to pick the debt relief that we think Greece needs in order to keep us on board.” So much for the second theory, that the IMF now ought to start acting toward Western governments the way it does to developing countries.
This brings us to the third, and most interesting, of the three explanations: that to save the global liberal order from right-wing populism, the IMF is turning social-democratic, “woke” even—as some British Tories accuse it of doing. The truth, I fear, is less heroic. What happened last week is simply that the IMF panicked. Along with other smart people in the U.S. government and at the Federal Reserve, its officials feared that the U.K. was about to do to the United States and the rest of the G7 what Greece had done to the euro zone in 2010: trigger an uncontrollable financial domino effect.
In the days preceding the Truss government’s mini–budget statement, the $24 trillion U.S. Treasuries market, whose health decides whether global capitalism breathes or chokes, had already entered what one financial analyst called a “vortex of volatility” not seen since the crash of 2008 or the first days of the pandemic. The yield on the U.S. government’s benchmark 10-year bond has risen sharply from 3.2 percent to more than 4 percent. Worse, a large number of investors had recently stayed away from an auction of new U.S. debt. Nothing scares those in authority more than the specter of a buyers’ strike in the U.S. bond markets.
To steady the investors’ nerves, officials came out in strength with reassuring messages. Neel Kashkari, the Minneapolis Federal Reserve president, summed up the spirit thus: “We are all united in our job to get inflation back down to 2 percent, and we are committed to doing what we need to do in order to make that happen.” This was the moment when the U.K. government chose to announce Britain’s most expansionary fiscal policy since 1972.
American officials were not the only ones to fret. Days before the London government’s so-called fiscal event, the European Systemic Risk Board—a body established by the European Union after the 2008–09 crisis—had issued its first-ever general warning, in effect confirming that Europe’s financial markets had fallen into the volatility vortex that originated in the United States. Europe’s electricity providers were being bankrupted by commitments to future orders at exorbitant prices, Germany’s mighty manufacturing industry was shutting down because of natural-gas shortages, and public and private debt was climbing fast.
An extra financial shock from the U.K. had the potential to cause huge spillover effects across Europe and beyond. If the U.S. subprime market could push French and German banks over a cliff in 2008–09, this latest shock wave from the Anglosphere could do similar damage, especially if it rocked the U.S. Treasuries market.
In the face of this mounting transatlantic storm, the IMF’s decision to step in was unsurprising. The only remaining puzzle is why the IMF pointed to the inequality-causing effects of the Truss government’s tax cuts for the ultra-rich. Although force of circumstance has changed something significant, I doubt this spells the demise of the IMF’s neoliberal instincts. Much more likely is this: The IMF realized that the post-2008 inequality-generating policies it helped enforce have plunged North Atlantic capitalism into a state of gilded stagnation that is now unstable, and it feared that the volatility vortex would worsen on news of measures that would create even greater inequality. If the IMF has begun to dislike inequality, it is only because the IMF sees inequality as a proxy for systemic instability.
After the 2008 financial collapse, the U.S. and the EU adopted a policy of socialism for bankers and austerity for the working and middle classes. This ended up sabotaging the dynamism of North Atlantic capitalism. Austerity shrank public expenditure precisely when private expenditure was collapsing; this sped up the decline of both private and public spending—in other words, aggregate demand in the economy. At the same time, quantitative easing by the central banks channeled rivers of money to Big Finance, which passed it on to Big Business, which, faced with that low aggregate demand, used it to buy back their own shares and other unproductive assets.
The personal wealth of a few skyrocketed, the wages of the majority stagnated, investment crumbled, interest rates tanked, and states and corporations became addicted to free money. Then, as the pandemic lockdowns stifled supply and furlough schemes boosted demand, inflation returned. This forced central banks to choose between acquiescing to rising prices and blowing up the corporate and state zombies they had nurtured for more than a decade. They chose the former.
All of a sudden, though, the IMF saw the liberal establishment’s lost capacity to stabilize capitalism reflected in rising economic inequality. So the last thing the markets needed, the fund’s technocrats realized, was more socialism for the wealthy. But it would take a feat of wishful thinking to interpret the IMF’s panic-driven reaction as a sincere conversion to economic redistribution and social democracy. A warning against an act of elite self-harm was the extent of it.