Friday, 26 March 2010

To IMF or not to IMF?

You were lucky yesterday if you caught a glimpse of Angela Merkel running around Brussels like a mad woman. The German chancellor was the center of attention during the spring summit of EU national leaders, as all of Europe looked to her to come to the rescue of Greece, and by extension, the Euro currency.

Merkel was going it alone in her unyielding objection to a bail-out for debt-ridden Greece, and she dug in her heels firmly. After much negotiation she relented and agreed to a bail-out, but on one condition – the American-controlled International Monetary Fund would have to be involved. European leaders are leaving Brussels today with a bailout plan in place, but only as an “emergency measure” to be triggered if Greece goes completely broke and cannot get any more credit.

Though it's stabilised the situation for the moment, the solution devised seems to have truly pleased no one. The euro rebounded from its long decline today in response to the news, but the markets did not reflect much confidence in the measure. Merkel is under tremendous pressure. The idea of a bail-out is extraordinarily unpopular in Germany, where many point out that such a bail-out is specifically forbiddon by the Maastricht Treaty. Many in Germany are saying that a core part of the eurozone agreement was that one state would never have to bail out another in the currency union. That, say some analysts, is why Merkel insisted on involving the IMF. Making the bail-out appear like an international effort will shield her from legal challenges that will surely be launched at home on the basis of the fund's violation of the Maastricht Treaty.

But there are severe problems with the IMF route that Merkel has insisted on, and the German newspapers have picked up on that today. The center-left Frankfurter Rundschau wrote,
"If -- after forty years and a single currency -- the Chancellor now calls on the International Monetary Fund to save Greece, she is betraying the very concept of Europe. In calling on the IMF, Merkel calls on none other than the United States, which dominates the IMF with its blocking minority of 17 percent. What a wretched state of affairs. What a disgrace for the European Commission and the European Central Bank. It is as if Germany could not solve a problem of the size of Hesse." (translation courtesy The World From Berlin)
The criticism was not limited to Merkel’s political opponents. Many papers on the right are also noting that Merkel’s insistence on IMF involvement, in order to shore up her political situation domestically, is a major step back for European integration. The financial daily Handelsblatt wrote,
"Now Greece has to bow down to the IMF and its strict conditions. Out of pride and principle, many Europeans see this as wrong-headed. Central banks within the euro zone are certainly not keeping their concerns a secret. The iron chancellor has scored a victory, but a lot of plates will be shattered in the process. But payback will come as surely as school kids take revenge on the school bully. Where will the majority for a German head of the European Central Bank now come from? Also, the much-needed agreement on a European Monetary Fund is now far from the agenda. The euro zone needs more transparency and controls as well as the ability to exclude those who continue to break the rules. But after the battle over Greece, there is scarcely much hope for a new consensus." (translation courtesy The World From Berlin)
Some German papers have even gone so far as to accuse the chancellor of duplicitous grandstanding. Germany has a state election coming up in two months, and German papers are speculating that she may secretly have supported a bail-out all along, but put on a show of opposition in order to help her and her party politically at home.

But if the IMF involvement was just a political ploy, it was a risky one. Just hours before the agreement was announced, European Central Bank President Jean-Claude Trichet told a news outlet that involving the IMF would be “very, very bad”. His comment ended up being published just minutes after the announcement, making the EU look, at the least, pretty conflicted.

It remains to be seen how a Eurozone-IMF bailout fund would be structured, and whether the IMF would be able to impose its notoriously draconian terms in the deal. Certainly all EU leaders are hoping that the day won’t come where the bail-out plan have to be used. But just the fact that the IMF had to be brought into the equation doesn’t speak highly of the current state of European unity.


Frank said...

I completely agree with the German editorials, it is humiliating that we've gone hat in hand to the Americans to bail us out of this mess, yet again. But the enraging thing is that we didn't have to this time. We could have solved this ourselves, and we didn't because of the usual lack of unity. It is so frustrtating.

M.G. in Progress said...

I am not sure if the deal can be construed as special resolutions regime for sovereign default or a leap forward towards greater integration and cooperation. It could be simply a naked gun put on the table to buy time.

The naked gun: the smell of fear at

Axel said...

I am German and like most of my countrymen I think it is not only a bad idea to bailout Greece, it is also illegal under the Maastricht Treaty. Involving the IMF may be a sneaky way to make it not illegal because it's not an "EU bailout", but the German public can see through that trick nand it won't help the CDU in the upcoming elections.