What's So Bad about the IMF Supporting Greece?

Currency in Crisis

The markets have sold the euro in response to news that maybe the obstacles to a European initiative to aid Greece are too greater and maybe the IMF has a substantive role after all.

Although what appears to be a crack in the German government over the issue may have set the proverbial cat among the pigeons, Germany is not alone. Press reports suggest that among euro zone members, Finland, Netherlands and Italy have become more sympathetic to Greece getting financial aid from the IMF.

On the other hand, Spain and France are reportedly leading the resistance to the IMF involvement. As noted earlier the France's Sarkozy has good reason not to let his political rival and IMF head Strauss-Kahn be seen as stepping in to fill the vaccuum within the euro zone.

Greece's Papandreous would seem to prefer a European solution. While generous with the verbal support, material aid has not been forthcoming. In some ways, he is right. The kind of dramatic austerity program it has enacted is not so dissimilar to what the IMF would have required, but without the benefits.

Papandreous wants a explicit mechanism to be announced, while domestic political considerations and EU treaty interpretations make "strategic ambiguity" the default position. There is a brinkmanship game being played out Up until now, European officials have been calling the shots, giving Greece deadlines and the like. Papandreous is playing well with a weak hand. In effect he is now giving the euro zone a deadline. He appears to be giving a one week deadline--the March 25-26 EU summit.

Greek officials have denied press reports that it will go to the IMF in early April if not satisfied with the results of the EU summit. But even in the denial, it seems to affirm that that is a choice open to it.

Separately, but related, Greece reported earlier today that unemployment rose to 10.3% in Q4 from 9.3% in Q3. Papandreous knows that there is a race against the clock. The austerity measures are producing a social backlash--(see general strike on March 11, for example). While Papandreous still enjoys public support, it cannot be counted on indefinitely, unless he can show some results--EU concessions. But this is not happening.

Reports indicate that the EU is taking Greece to court again. This time for failing to refund improperly collected VAT and other taxes.

The benefits of bringing the IMF to center stage is that it avoids the treaty wrangling and domestic political backlash that support to Greece would entail. It also brings in an experienced institution. It buys Europe time to develop its own institutional capacities.

The only downside appears to be the political embarrassment of having to call in the IMF. Claims that the IMF may be a good short-term solution, but would lead to the dissolution of the euro zone over the longer term seems to be an exercise in hyperbole. There is no reason why the breaking up of the euro zone follows from the IMF assistance for one (or more, if necessary) of its members.

Moreover the idea that Greece should be expelled or drop out temporarily to effectively devalue and then re-enter, or that German should leave (ostensibly before its pockets are picked) do not seem realistic alternatives. In addition to practical difficulties, it is not clear that such moves address the underlying problem, of which the debt and deficits are largely symptoms.

The real issue is competitiveness. Germany has it. Greece and many other euro zone members do not. The debt issue is urgent but the competitive issue is critical.