Greece's Financial Odyssey: Enter the IMF

March 19, 2010 4:45 PM

The news that Germany prefers the International Monetary Fund (IMF) to a European ad hoc solution for rescuing Greece from financial chaos is welcome for multiple reasons:

1. The IMF is the most appropriate authority to handle such a financial crisis. It would be little more than absurd for the Europeans, who excessively dominate the IMF, to say that the Fund does not have their mandate to work in their own back yard. So far, the global financial crisis has strengthened the authority of the IMF, which has disbursed more money than ever before. Multilaterialism is certainly the right solution for a major international financial crisis.

2. Since the Greek government has essentially already agreed to everything that the IMF can ask for, the IMF has an easy task. It needs to do little but provide credits and monitor conditionality, a perfect situation for the Fund. This is the only cakewalk in this drama.

3. The only reason for a European-only solution was pride, which is always a bad argument. The European Union would have damaged its reputation if it had intervened without mechanisms, procedures, and serious amounts of money. Now, the European Union and the German-Greek relationship can be salvaged. Bad policies breed bad national relations.

4. The proposal for a European Monetary Fund (EMF) to do the job—whatever that meant (undermining of the IMF? the destruction of the eurozone?)—was always a bad regional idea and it has been appropriately ended. It is true that the European Union needs reinforced fiscal policy, but not a competitor of the IMF. The issue was the wrong one and therefore the answer was equally wrong.

5. Apparently, the rivalry between President Nicolas Sarkozy of France and Dominique Strauss-Kahn of the IMF (Sarkozy's potential rival in the French presidential elections) has been a major factor in French resistance to an IMF role in the crisis. What can one say? Anyone whose single interest is that the other man fails deserves to lose.

6. I do not think that the idea of a common European fiscal regime has failed. On the contrary, the recent circus shows how badly needed it is. The Scandinavian countries are doing fine since they by and large stick to the Maastricht criteria. The recent debacle should be a good reason for us Europeans to tighten and straighten our thinking. Few things are as good for progress as a total and complete humiliation—which this is.

7. Needless to say, I hope this will lead to the expansion of the eurozone to more serious countries (such as the Baltics and Bulgaria, not to mention Sweden, Denmark and Poland), the long-term imposition of serious fiscal policies, and a renewal of an operative stability and growth pact that actually reinforces fiscal policy.

It is not clear how the markets will react, but markets like clarity and stability. Hopefully, Germany's swing to the IMF means that the long, excruciating public debate that has cost Greece higher interest rates will end. If the IMF finally enters, the credibility of the global financial resolution regime will be reinforced. If necessary, the European Union should naturally cofinance an IMF standby loan to Greece, as it so wisely has done for Latvia, Hungary, and Romania. But the resolution of such a crisis is far too serious to be left to the public debate of improvising politicians.

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Anders Åslund Former Research Staff

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