Do you remember when Europe used to say the IMF would get involved in Europe over the euro’s dead body? Well I certainly do.
Back before Greece got its bailout deathwish, it wasn’t even clear there would be a bailout, let alone one with the IMF involved. As late as February of 2010, the Dutch were rejecting any bailout whatsoever along with the Germans. And as I put it then: “When I wrote that The Germans will not bail out Greece, there was considerable chatter that a bailout was imminent. While I said the Germans would not bail out the Greeks, I did think that some backdoor bailout sleight of hand or debt guarantee might be arranged in exchange for austerity measures – and this still might occur.”
What happened at the time was that Europe gave Greece “psychological and political support“, thinking they could ride this out without financial support. They were wrong and the bailouts began soon thereafter. But, at the time, IMF involvement was seen as a non-starter. It was seen as humiliating for Europe to need international assistance from the IMF because only banana republics and third world countries needed IMF assistance, right?.
In March of 2010, the Germans started to think the IMF were necessary to enforce discipline. Originally, they wanted no bailout but as the situation progressed they started to realise that default by Greece was inevitable – and so they relented. Shortly thereafter, the French started to change their view, realising that with the IMF came less financial burden on France AND a group with experience enforcing austerity. That would mean the IMF would be the fall guy instead of the EU, France or Germany.
France is ready to let the IMF into the euro area to provide financial assistance to Greece.
This is a major concession by Paris to Berlin that gives Angela Merkel’s plan the green light for European support for Athens tomorrow on Thursday in Brussels. Never since the birth of the single currency has the International Monetary Fund, headquartered in Washington, acted as lender of last resort in a country within the eurozone. “This is not desirable” Jean-Claude Trichet, President of the European Central Bank (ECB) said recently. “Using the IMF to help Greece would be a sign of weakness,” Patrick Devedjian, economic recovery minister, said.
France, which traditionally sees the IMF as an “agent of the U.S. Treasury” would have preferred a “100% European” solution to the crisis in Greece. The plan approved by the Eurogroup this past 15 March, therefore, did not appeal to the IMF. However, the intransigence of Berlin, whose position has hardened in recent days, requires Paris to relent.
In addition to the IMF, France would be prepared to accept a strengthening of European budgetary discipline by activating the articles of the Treaty of Lisbon providing for the abolition of voting rights for countries not obeying the common budget rules, or even the expulsion of a Member State. Many of the concessions were already expressed in the German press yesterday, [demonstrating] that Angela Merkel had succeeded in imposing her views on the leaders of the eurozone.
I see it as immensely ironic that the woman who was the French Finance Minister at the time is now the head of the IMF – and she is the one who has turned on the EU in trying to move against austerity for Greece. I don’t know where this is going yet but it is instructive to look back at what happened in February and March of 2010 and how positions switched to consider a bailout at all and to have the IMF play a central role. For me, it is a reminder that this whole affair is about the horse trading that goes on as euro zone countries try to meet policy choices that will appease their domestic voters.
In 2010, Germany advocated for the IMF so as to enforce discipline. They convinced the French of this and so the Troika was formed. Now, the IMF has broken ranks from the ECB and the EC on the need for front-loaded austerity. And Germany’s Chancellor Angela Merkel is still hewing the full-on austerity line. I think she will be forced into retreat. I can’t say for sure because this is politics, not economics. And we are coming into an election year in Germany. But clearly, we are seeing a shift in the view that austerity works as a primary policy tool to deal with this crisis. And that’s probably a good thing.