It is welcome news that Germany seems to be swinging in favor of a role for the International Monetary Fund (IMF) in helping Greece salvage its financial credibility and reform its basic economic structures.
After weeks of pledges of political and financial support, Angela Merkel appears ready to send Greece crawling to the IMF. Germany cites legal reasons for its position. In past rulings, its constitutional court has interpreted the stability clauses in European law in the strictest possible sense. "It is hard to say whether this argument is for real or is just an excuse not to sanction a bail-out that would be politically unpopular. It is probably a combination of the two," according to Wolfgang Munchau in the Financial Times on March 21st.
This new possibility of a combined intervention by the IMF and the EU -- which was resisted until the weekend when Germany seemed to change position -- will certainly be at the center of talks about Greece during an EU summit meeting this week in Brussels. Most other countries in the eurozone oppose any decision to turn to the IMF as “an embarrassment” for Europe.
The reality surely is quite the opposite: doing nothing about the Greek predicament would be embarrassing proof of European fecklessness. As things stand, an opening to the IMF could put an end to the public debate that has cost Greece higher interest rates. An IMF role would help convince markets that a credible solution is in the works – especially the EU would agree to co-finance a loan to Greece. Such a standby loan would then come with the strong “conditionality” that comes with IMF help.
Since the Greek government has essentially already agreed to everything that the IMF can ask for, the IMF would have an easy task that amounted mainly to providing credits and monitoring compliance. It would be “a cakewalk,” according to Anders Aslund of the Peterson Institute in Washington.
Explaining French-led resistance to the idea, Anders speculates that rivalry between President Nicolas Sarkozy of France and Dominique Strauss-Kahn of the IMF (Sarkozy’s potential Socialist rival in the French presidential elections) has been an influential factor. Anders’ verdict on the Elysee’s stance? “Anyone whose single interest is that the other man fails deserves to lose” the argument.
In his view, the crisis, if resolved with IMF help, can avoid the collapse of the eurozone and instead lead in the opposite direction: to the expansion of the eurozone to more serious countries such as the Baltics and Bulgaria, not to mention Sweden, Denmark and Poland. In turn, that development would bolster the long-term outlook for serious fiscal policies and an operative stability and growth pact that would actually reinforce fiscal policy.
A similar view comes from Nouriel Roubini, an American economist acclaimed for predicting the U.S. crash in 2008. Noting that the Greek crisis will need time to resolve, he recommends turning to the IMF.
“The long history of nations in financing troubles shows that the necessary structural reforms should be accompanied by large and front-loaded financing packages extended under strict conditionality. This would eliminate immediate refinancing fears while the necessary structural reforms were undertaken under close supervision.
“Given the risk of contagion from Greece to other EU countries through their banking sectors, for example, the EU or the European Central Bank alone would not be in a good position to impose conditionality once a rescue package was implemented. But funding without strict conditionality is the least desirable solution, and it has not worked in the past. This is why a credible IMF program that tranches financial support with the progressive achievement of fiscal and structural reform goals is the right, if risky, solution. An IMF solution can also better minimize the moral hazard problem than an approach based on loan guarantees.”
As all analysts note, Chancellor Angela Merkel, the single most influential decision-maker in this situation, faces fierce domestic pressures against letting German tax-payers provide a “bail-out” for Greece. This has led her to “play the clock,” delaying any concrete action as long as possible while insisting that Athens must start producing results on its promised reforms. Gaining time is important for Merkel because she faces imminent and important regional elections.
Now Athens may have succeeded in forcing her hand by threatening over the weekend to turn to the IMF unless EU leaders produce some concrete decisions about aid for Greece during their summit meeting this week. Berlin has said that aid will “not be on the agenda” because Greece still has more homework to do. But if EU leaders embrace the IMF option as a possible ally, that alone could help stave off mounting pressures on Greece in the bond markets that are crucial for borrowing to roll over Greek national debt.
The IMF is a much more realistic prospect than the “European Monetary Fund” that has been floated in recent days. Mounting such an institution would take months, and the result would have little more credibility than the current EU governments and their lack of consensus. In contrast, the IMF is already at work in Ukraine and several other European countries, helping them stabilize their finances and modernize their economies. The EU itself has a strong voice in IMF management decisions. Germany’s supreme court, which has voiced skepticism about the constitutional legitimacy of any step handing over more German sovereignty to the EU, would not be troubled by IMF actions.
The idea of an “EMF” (an EU version of the IMF) was launched by German Finance Minister Wolfgang Schaeuble and received support from Merkel and leaders in other eurozone countries. For example, Luxembourg’s Jean-Claude Juncker, who is prime minister and minister of finance, has backed the idea, but said he was alarmed by the fact that Schaeuble’s proposal included the idea of expulsion from the eurozone for member states that proved incapable of abiding by the rules. He and Merkel pointed out that lengthy planning (and perhaps even treaty changes) would be needed to get this new entity up and running – a point that lends strength to arguments in favor of an early turn toward the IMF for possible help.
In the end, a joint IMF-EU action could succeed in a way that put the eurozone on a sounder footing and also provided, not an embarrassment, but a “face-saving solution” for the crisis that has festered for months at the core of the euro.