Lütz, a professor of international political economy at the Otto Suhr Institute of Political Science at Freie Universität Berlin, had just received approval for her ambitious project when Greece – viewed until then as being on the right track – suddenly started making headlines again. Together with her team, Lütz will spend the next three years exploring the negotiation options available to European countries that have been – or still are – reliant on loan programs from the “troika.”
In the wake of the financial crisis, the term “troika” has come to be used in Europe for the representatives of the European Commission, International Monetary Fund (IMF), and European Central Bank (ECB), which jointly develop and implement loan programs for the countries with the highest debt levels. Aid programs for public-sector loans are still running in Greece and Cyprus, but have now been concluded in all the other countries where they were launched – Latvia, Ireland, and Portugal. This will make the group’s research easier, Lütz says, since the protagonists can now speak openly about their negotiation tactics.
That wasn’t the case during the advance study conducted for the project, which is now receiving 450,000 euros in financing from the German Research Foundation (DFG). At the time, the negotiations with Portugal were still in progress. Inquiries sent by the Center for International Political Economy in Berlin, where Lütz works, to the troika went unanswered since there was concern that any public announcement would shift the balance of power, Lütz says.
Most Research to Date Has Focused on Loans for Developing Countries
But that is exactly what the team is studying: What options do the countries taking the loans – in principle the “weaker” partners, since after all, they need money from the troika – have in order to carve out leeway for themselves amid the often-rigid demands for budget cuts and credit terms? In principle, there has already been a great deal of research published on this subject, Lütz says, but the projects studied mainly involved IMF loans for developing countries, where the conditions are very different from those in Europe. These countries often have autocratic rulers who can simply enforce the terms stipulated by the IMF in their country, she explains.
Things are different within the confederation of nations and internal market formed by the European Union – and especially within the euro monetary union. Whether that constitutes an advantage or a disadvantage during negotiations is part of what the research team plans to study over the next three years. Two doctoral candidates and two student assistants are helping Lütz in the process. Alongside research reports and scholarly articles by team members in relevant journals, Lütz says she would also like to write a book on the strategic options available to beneficiary countries during the euro crisis once the project is over.
The team’s research will focus on interviews with the major players, meaning the decision makers in the indebted countries and within the troika, the professor says. Before that, the team will use records kept by the troika and the governments of these countries, contracts and agreements, and fundamental economic data to familiarize themselves with the material in as much depth as possible so that they can ask effective questions.
Which Strategies for Which Country?
The agenda for the project also includes two conferences on the subject. Since the project is just starting now, it is too early for even initial results. “But we do, of course, already have a few initial hypotheses after looking at media reports and minutes of meetings,” Lütz says. The strategies that beneficiary countries can use to improve the terms include things like sowing discord between the players in the troika. The troika was founded in order to ensure that the three major funders could not be played off against each other, but there has been frequent debate about the right approach even within the triumvirate itself.
The IMF, for example, recommended that Latvia be allowed to join the euro even though the country did not meet the necessary stability criteria at the time of the negotiations. The European Commission, for its part, was strictly against the move, arguing that the rules for euro countries always had to be the same, or a bad example would be set.
In Greece’s case, another strategy is apparent, one that applies in democratic countries in particular. Lütz calls it the “hands-tied strategy.” A democratically elected government can argue that it would be voted out of office and replaced with a radical left- or right-wing party if it consented to too-stringent budget cuts – and that this radical group would then halt all debt repayments. And that in turn, Lütz says, is not in the interest of countries like Germany and France – whose banks would suffer existential problems years in advance of a Greek bankruptcy.
The situation was similar in Latvia, only with Swedish banks, says Lütz. As a third example, Portugal’s constitutional court invalidated a number of budget cuts, so the Portuguese government was able to take the stance that they were willing to accept the conditions, but were not allowed to do so. The strategic options available to Europe’s democracies might be no better or worse than those in autocratically governed developing countries, but they are certainly significantly different, Lütz explains.
The professor hopes that by the end of the project, she will have discovered which strategies have proven to be particularly good or particularly bad for which country and at what time. A solution may have been found for Greece, too, by then. Of the five countries included in the research project, the Mediterranean nation is the only one for which it will be possible to observe the negotiation tactics over a longer period while the project is still under way. This makes it an experiment under real-world conditions, and the researchers have a front-row seat.