The IMF’s Role in the Euro Area Crisis: Financial Sector Aspects

The International Monetary Fund (IMF) played a path-breaking role in understanding the financial-sector dynamics of the euro area crisis. It was the first among public authorities, and among the first more generally, to acknowledge the role of the bank–sovereign vicious circle as the central driver of contagion in the euro area, and the first public authority to articulate a clear vision of banking union as an essential policy response, building on its longstanding and pioneering support of banking policy integration in the European Union. In individual countries, the IMF’s approach to the financial sector was appropriate and successful in Ireland and Spain, more limited in the Greek SBA, and less compelling in Portugal where vulnerabilities remained when the country exited the program. Going forward, the IMF should further integrate financial-sector policy together with fiscal and macroeconomic issues at the core of its operations, and should devote particular effort to adapting its processes and methodologies to the new context of European banking union.