March 4, 2010
I.M.F. Help for Greece Is a Risky Prospect
Greece skirted disaster this week by persuading investors and politicians that it is finally on track to fix its finances. But even before the dust settles, the government is setting the stage for a potential conflict with Germany, France and other European governments that may raise doubts about the sustainability of
the euro project.
In the last two days, Greece’s finance minister has threatened to turn to the
International Monetary Fund for a bailout if Chancellor
Angela Merkel of Germany and other European politicians resist pledging aid to help Greece cope with its newfound frugality. Asking the fund for help could create a new round of financial and political turmoil by sending the message that Europe cannot resolve its own problems, analysts said.
“It would be damaging for the euro zone going forward because it would sow seeds of doubt about whether this is really a currency union, or just a group of countries that share a currency,” said Simon Tilford, the chief economist of the Center for European Reform in London.
Policy makers and leaders of many countries that use the euro see Greece’s troubles as a problem within the family. They want a homegrown political solution to show that Europe can fix internal economic crises without outside help.
Turning to the I.M.F., which often helps struggling emerging-market nations, is seen as a stigma that is to be avoided, a concern underscored by the
European Central Bank’s president,
Jean-Claude Trichet, on Wednesday. “I do not trust that it would be appropriate to have the introduction of the I.M.F. as a supplier of help,” he said.
No member of the euro zone has had to borrow from the I.M.F. since the official use of the common currency began in 1999, and no major industrialized country in Europe has done so since Britain in 1976.
But from Greece’s perspective, the I.M.F. would force the government to swallow nearly the same bitter medicine that Germany, France and others have required — but at least Athens would receive guaranteed financial aid from the I.M.F. in return.
In addition, it is not clear that Germany and other European governments seeking to contain the crisis have the resources or expertise to monitor Greece and other profligate euro members for the many years that it will take for the troubles to blow over. And if Greece has to refinance more and more of its debt in the coming months, the crisis could intensify.
“It’s a black eye for the euro zone if one of their members has to turn to the I.M.F. for support,” Randall W. Stone, a political scientist at the
University of Rochester, said. “That’s embarrassing. On the other hand, it’s potentially more damaging to create a precedent for the rich European countries to bail out the poorer ones when they get into financial trouble.”
Greece’s game of brinkmanship may well bring the I.M.F. to its doorstep. “I think the I.M.F. is going to get called in before the end of the day,” Kenneth S. Rogoff, a Harvard economist and former I.M.F. chief economist, said in a phone interview from Germany. “Greece’s austerity plan is like a New Year’s resolution. It’s not going to be easy to enforce.”
For Greek leaders facing wide civil unrest, including the unions’ occupation of the country’s finance ministry on Thursday, the threat of turning to the I.M.F. can serve useful ends.
“People like to blame the I.M.F. for the policies they impose, but in many cases these are policies the governments know they have to push through,” said James Raymond Vreeland, a political scientist at
Georgetown University. “They use the leverage of the I.M.F. so it’s a little more politically palatable.”
But even setting aside the symbolic implications, some experts believe that an I.M.F. bailout would deeply rattle the markets.
Despite the reassuring bond sale on Thursday, investors could quickly drive up Greece’s borrowing costs if they come to believe an I.M.F. intervention is likely, said Michael L. Mussa, a former I.M.F. research director who is now a senior fellow at the Peterson Institute for International Economics.
“The market is expecting other Europeans to do something,” Mr. Mussa said. “If that expectation is disappointed, I don’t see how they’re going to resolve the crisis.”
The biggest challenge is in Germany, which has historically tended to enforce fiscal and economic rectitude on its neighbors. Many German taxpayers are vehemently opposed to paying for the profligacy of their free-spending neighbors in Greece and other southern European countries that let their deficits soar sky-high instead of taming them when times were good.
At the same time, German banks also underwrite much of the Continent’s debt and exert considerable influence in domestic politics, according to Mark S. Copelovitch, a political scientist at the
University of Wisconsin, Madison. Germany “doesn’t want its banking sector to go under because Greece has defaulted,” he said.
Yet nightly broadcasts of widespread strikes in Greece, and accusations by some in Athens that Germany owes Greece for inadequate reparations paid out after the Second World War, have some Germans thinking that intervention by the I.M.F. may be worth the trouble.
“In Germany, the public might favor an I.M.F. intervention if it reduced Greece’s reliance on German funds,” said Justin Vaïsse, a senior fellow at the
Brookings Institution.
European power struggles are also at stake. Simon Johnson, an economist at the
Massachusetts Institute of Technology and a former I.M.F. chief economist, said that Germany has long sought to have a German lead the European Central Bank, and an I.M.F. intervention could be seen as tarnishing Germany’s credibility.
Nicolas Sarkozy, the French president, views
Dominique Strauss-Kahn, the I.M.F. leader and a former French finance minister, as a political rival, and would be loath to give him a perceived victory.
For weeks, the I.M.F. has tried to say as little as possible about Greece other than to state that it stands ready to help. Mr. Stone said that strategy seems the wisest for now. “The only thing worse than announcing an I.M.F. program is announcing that maybe you’re going to have one,” he said.
