Crisis watch: Greece and the IMF

Traditionally, “You should go to the IMF” is not something you would say to a friend. Over the past few decades, the IMF has become associated with excessive fiscal austerity and extreme political insensitivity. Countries borrowed from the IMF only when all else failed and when there was no other way to pay for essential imports. For Iceland in autumn 2008, for example, the only alternative to IMF financing was to eat locally sourced goods—mostly fish.

But the IMF has changed a great deal in recent years under the auspices of Dominique Strauss-Kahn, its managing director. Strauss-Kahn, a former French finance minister and possible Socialist candidate for the French presidency, has pushed through changes that allow the IMF to lend without conditions in some circumstances, and to give greater priority to protecting social safety nets. He has also moved the Fund away from its obsession with fiscal austerity measures (a big mistake—with traumatic consequences—in Indonesia and South Korea in 1997).

Greece undoubtedly has serious problems today. The great opportunities offered by European integration have been largely squandered. And lower interest rates over the past decade— brought down to German levels through Greece being allowed, rather generously, into the eurozone—led to little more than further deficits and a dangerous build-up of government debt.

Germany and France—as de facto EU leaders—are haggling over a support package, but they have made it clear that Greece must slash public-sector wages and other spending. Greek trade unionists are out on the streets.

If Greece still had its own currency, everything would be easier. As in Britain since 2008, the Greek exchange rate would depreciate sharply. This would lower the labour costs, restoring competitiveness while inflating asset prices and helping borrowers who are underwater on their mortgages and other debts.

But, with Greece and other troubled eurozone economies (known as the PIIGS: Portugal, Ireland, Italy, Greece and Spain) having surrendered monetary policy to the European Central Bank (ECB) in Frankfurt, their currencies cannot fall in this fashion. So Greece—and arguably the PIIGS more generally—are left with the need to curtail demand, lower wages and cut the public sector. The last time we saw this kind of precipitate austerity—when countries were tied to the gold standard—it contributed directly to the onset of the depression in the 1930s.

This is a situation tailor-made for the “new IMF.” Since early 2009 it has had greater resources to lend to troubled countries, to offer a form of international circuit-breaker when it looks like the lights might go out. The idea is not to prevent necessary adjustments but to spread them over time, to restore confidence and serve as a seal of approval on a government’s credibility.

The IMF was created in the waning days of the second world war, as a US-European partnership. Europe retains strong representation at the Fund, and has always chosen its leader—most emerging markets complain that Europe has far too much say in how the Fund operates. Yet at this time of growing crisis, while there is still time to act, the Fund is confined to the sidelines.

This is in part because the German chancellor, Angela Merkel, manoeuvring to ensure that a German is the next head of the ECB, does not want the Fund to become more involved in euro-zone policies. The IMF might reasonably take the position that ECB policies have been overly contractionary—resulting in a strong euro and very low inflation—and are no longer appropriate for member countries in the midst of a financial collapse. If the IMF were to support Europe’s weaker economies, this would challenge the stance of Frankfurt-dominated policymakers.

But the real reason is simpler. When French president Nicolas Sarkozy put forward Strauss-Kahn to run the IMF, he meant to park a rival in a faraway place. Then the financial crisis hit, and Strauss-Kahn was propelled to centre stage.

With France’s next presidential election in 2012, the last thing Sarkozy needs is for Strauss-Kahn to play a statesman-like role in saving the eurozone. We will hear all kinds of excuses from EU sources for excluding the IMF: “The Fund is too American,” “Europe must resolve its own problems,” and “the IMF is not appropriate to our circumstances.” Given the magnitude of the Greek crisis, they will all ring hollow.

Sometimes history is driven by forces beyond our control, and sometimes by sheer chance. And at other times, like now, much that hangs in the balance is affected by the personal and short-term tactical concerns of people running for election.

The EU’s leaders will try hard to keep the IMF at bay. This is not good news for Greece—or for anyone who cares about global financial stability.