For weeks European leaders have talked about eurozone solidarity and their promise of "determined and coordinated action, if needed" while supporting the successful austerity measures taken by Athens. It is becoming increasingly clear, however, that words are what "euro solidarity" amounted to, and that the International Monetary Fund (IMF) will be invited to assist Greece after all.
The longer that talks about the "details of a eurozone bailout" have dragged on, the more unpopular the talk has become among European publics. By now, the willingness of European leaders—particularly in Germany where the government faces an important regional election on May 9 —to back up their rhetoric with taxpayer euros has all but disappeared. One cannot interpret Chancellor Merkel's comment that "a quick act of solidarity is definitely not the answer" any other way.
The eurozone has signaled that it will step in to provide expensive (i.e., with a strong incentives to return to markets as soon as possible) financing for Greece only at the last resort, to prevent a Greek default from threatening French and German banks. Words will have to suffice to aid Greece in lowering its cost of refinancing. This development has two implications:
First it kills any idea of "European fiscal union" or "European economic government" growing out of this crisis. Note that the only proposal by a senior European politician for a new EU institution—German Finance Minister Wolfgang Schauble's suggestion of a European Monetary Fund (EMF)—has the option of forcing out fiscally errant members from the eurozone. This would potentially undo existing European integration, rather than increasing it. On the other hand, such a "shove out clause" will never be added to any EU treaty.
Second, the eurozone refusal to help Greece meet its challenges raises the question of what the Greek government should do next after implementing what is widely acknowledged as a good first step toward reestablishing its fiscal credibility. Now that it is clear that Greece will get no financial assistance in return, it may have to call the eurozone bluff and go to the IMF after all.
To their credit, at least some eurozone governments—including the Netherlands, Finland, and increasingly even Germany—recognize this reality. They appear to realize that if they are not willing to ignore political resistance (and in the case of Germany—a hostile Constitutional Court) to put up actual money as a contingency to support Greece, they cannot also rebuff a Greek request for such support from the IMF.
In effect, Prime Minister Papandreou has announced that he will ask the eurozone to put up (their own money) or shut up (about the IMF). This would have clear winners and several losers.
The Greek government would win by getting an "actual number," i.e., the explicit guarantees for financial assistance that an IMF program provides, in the absence of anything comparable from the eurozone. Greece could then bring down its costs of capital come April and May. Moreover, since the Greek government has already implemented what the joint European Community–IMF–European currency board technical delegation recommended for 2010, Athens will probably not need additional immediate steps to qualify for an IMF program. Greece would get a free lunch, so to speak. Indeed, considering the severity of earlier eurozone demands to Greece, which are reminiscent of drastic IMF austerity steps demanded during the Asian financial crisis in 1997–98, the IMF might turn out to be just a little bit less stringent for the rest of 2010.
Eurozone taxpayers would win by having the globally funded IMF contribute funds to Greece, too, rather than have to do it solely by themselves. Eurozone governments would win by avoiding any unpopular decision to aid Greece based on abstract notions of "European solidarity."
Obviously the IMF—by enlisting an Organization for Economic Cooperation and Development (OECD) country as a client for the first time in decades—would also have its credibility strengthened, perhaps even to the degree that G-7 nations start to listen to its recommendations. It is also not without irony that the expansion of IMF-pledged capital approved by the G-20 in 2009 will now be "recycled" not only among Eastern European EU members, but among the eurozone members, too. That expansion was spearheaded by the European Union commitment of € 75 billion in March 2009 (and it has since been beefed up by a further €50 billion from the European Union to the IMF).
Most prominent among the losers are "European integrationists" who will see their preferred "European solution" to Greece's problems fail. There will be no further EU fiscal integration steps from this crisis. At the same time, one might argue that the failure of this option is already evident, so an official Greek approach to the IMF simply makes de jure what is already de facto the policy outcome for Europe.
An approach to the IMF is a slight to the European Central Bank (ECB), where the current (and future) leadership has advocated a "European solution" for Greece. Historical institutional rivalries and standard bureaucratic turf wars guarantee that the ECB will see direct IMF intervention as a threat to the independence of its monetary policy decisions. It is not without irony that this tension flares a few weeks after the ECB and IMF had an unusually public confrontation over the appropriate level of inflation. To the horror of the ECB, the IMF research department suggested that under certain circumstances, up to 4 percent inflation would be a good idea. Frankfurt will make sure that option does not exist in any future IMF program for Greece.
Another loser will be the European Commission as it too cedes turf to the IMF. There is also a further risk—which is sure to be feared in Brussels—that the competence and credibility of all EU institutions will be diminished by bringing in the IMF.
Lastly, it is clear that Germany—the European Union's perennial money master—in times of dire fiscal straights into which the entire European Union is heading now has even more influence. No EU initiative that requires any kind of new funding is possible without the explicit consent of Berlin, and no expansion of qualified majority voting rights under the Lisbon Treaty is going to change that. There is not even the normal need for Franco-German agreement for anything to move in the European Union—it's only Berlin that matters now. And that is not likely to please the French.
Most likely, in good European summit fashion, EU leaders will decide on a joint EU/IMF intervention as previously agreed to in Hungary and Latvia. This will save some face for all involved, but won't change who won and who lost in Europe from this crisis.
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