February 18th, 2010
11:56 PM GMT
“Euro area member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole.” The clear message from the European Union statement left no one in any doubt. When it comes to Greece, and other Eurozone members, we will deal with the problem, thank you.
Then tucked away, in the middle of the statement, the acknowledgement that the European Commission would draw on the experience of the IMF in monitoring the position. Which left me wondering…why didn’t the IMF just deal with the whole sorry mess in the first place?
The IMF’s very raison d’etre is to help countries re-build economies after years of mis-management. It has decades of experience of sorting out these problems.
There's hardly a continent in the world that hasn’t felt the lash of the IMF’s reform programs, usually imposed under threat of withholding vitally needed funds.
The Fund’s own Web site admits it lends to “countries in severe financial trouble...helping a member country avoid sovereign default…something that would be extremely costly both for the country and possibly for other countries through economic and financial ripple effects.”
Have you ever read a better definition of the situation facing Greece and the Eurozone?
Indeed, the IMF has been monitoring Greece for years through the regular Article IV process, with a prescient warning of events that have now happened.
In 2006 it warned: “The current account deficit has widened to an unsustainable level.” Then in 2007: “Private sector credit has risen very rapidly and inflationary pressures have continued, resulting in a gradual but steady erosion of competitiveness."
This was an accident everyone knew was going to happen.
So why not let the fund dig deep and do the dirty work? Politics pure and simple.
It would be embarrassing for the EU and Eurozone to admit that it could not run economies in its own backyard. Greece has been allowed to run Olympic sized rings round the strict rules of Euro membership thus vitiating the Eurozone and creating the current crisis.
For the IMF to ride to the rescue would be a stunning admission of failure, even though EU countries are members of the Fund and are entitled to its assistance.
There is also the heavy involvement of French presidential politics. IMF Managing Director Dominique Strauss-Khan might well stand as the socialist presidential candidate against Nicolas Sarkozy in 2012.
The last thing President Sarkozy wants is for Strauss-Khan to be seen as the savior of the Eurozone. So the IMF is relegated to the role of “technical assistance” in helping the European Central Bank and European Commission “monitor” the situation.
In the past two decades the IMF has lent money to Russia, Argentina and Brazil. It has defused financial crises from Asia to Latin America and Africa. The Fund is now the G20’s preferred group to coordinate member countries’ strategies post-recession.
In recent years it has even reformed its bad cop image to be the more friendly face of international lending.
With its vast experience of implementing macro-economic reform the IMF is uniquely suited to whipping Greece and any other euro-miscreants into shape, without worrying too much about intra-continental rivalries. But it won’t be allowed to.
The EU, with a Panglossian view of its own abilities and an inability to recognize its practical limitations, remains stubbornly firm in saying 'non'. It should let the IMF get on with the job before any more damage is done.
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