economics

March 14, 2010

Germany Backs European Version of IMF

Filed under: Uncategorized — ktetaichinh @ 4:24 pm
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By MARCUS WALKER And BOB DAVIS

Germany expressed support for creating a “European Monetary Fund” that could bail out indebted nations in the euro zone, showing how Greece’s debt crisis is forcing Europe to rethink the institutional design of its common-currency area.

German Finance Minister Wolfgang Schäuble said he would “present proposals soon” for a new euro-zone institution that has “comparable powers of intervention” to the International Monetary Fund.

In an interview with German newspaper Welt am Sonntag, Mr. Schäuble said the euro zone should draw lessons from the Greek crisis, which has exposed the region’s lack of tools for dealing with a member country at risk of defaulting.

[EUROIMF1] European Pressphoto AgencyAbove, France’s Nicolas Sarkozy and Greece’s George Papandreou meet in Paris on Sunday. Below, Germany’s Wolfgang Schåuble.

[EUROIMF2] Associated Press

Any European Monetary Fund would take too long to create to be of use for Greece’s current problems, European officials say. But the idea is part of a wider debate in Europe about the need for euro-zone governments to more closely align their economic and fiscal policies. They now share a common monetary policy but have no parallel political union.

The European Union’s treaties prevent existing European Union institutions from bailing out a struggling country, and national governments such as Germany’s, fearing voter ire, don’t want to risk their taxpayers’ money directly on nations such as Greece.

At the same time, most euro-zone governments are opposed to letting a euro member turn to the IMF, which has both the financial firepower and experience in negotiating economic-adjustment programs with countries with heavily strained finances.

“Accepting financial aid through the International Monetary Fund would in my opinion be an admission that the euro countries can’t solve their problems through their own efforts,” Mr. Schäuble said.

Divisions over the issue have emerged even within the German government, as Chancellor Angela Merkel is more open than her finance minister to letting the IMF play a greater role in Greece, according to people familiar with her thinking.

The IMF is likely to be wary of any new regional financing mechanism in Europe, even though Mr. Schäuble said any new financing mechanism shouldn’t compete with the IMF. The Washington-based fund sees itself as the world’s main economic-response unit and worries that regional funds could detract from its mission.

“We do not have a view because we do not have information as to what’s been proposed,” an IMF spokesman said.

The euro zone is the second region to view itself as off limits to the IMF, following developing Asia. After the tough conditions the IMF insisted on to bail out Asian nations during the financial crisis there in 1997 and 1998, a number of countries—especially Japan—proposed an Asian monetary fund.

The IMF and the U.S. government were able to quash that proposal, which they saw as a go-it-alone strategy by the world’s fastest-growing countries. In practice, Asian nations reduced the IMF’s influence by bulking up their reserves, and through a loose pooling of reserves called the Chiang Mai Initiative.

Greek Prime Minister George Papandreou, who announced stiff austerity measures last week, won verbal support from French President Nicolas Sarkozy on a visit to Paris Sunday. Mr. Sarkozy said a number of EU countries were preparing a support package for Greece, even though he doesn’t believe the Greek government will need financial help.

“There are concrete, precise tools that we are studying, about which we are not disclosing any more details tonight, but which will allow us to show, when the time comes, that not only does Greece have political support, it will be supported in all possible aspects,” Mr. Sarkozy said, adding that Finance Minister Christine Lagarde is working on the plan with her EU peers, the president of the European Central Bank and the head of the European Commission.

But Greece has been unable to secure concrete promises of financial assistance from euro-zone governments if it can’t borrow enough funds on bond markets. Greece faces debt repayments of around €22 billion ($30 billion) in April and May.

Ms. Merkel has led resistance to bilateral aid from other European governments, fearing a voter backlash ahead of key regional elections in Germany in May. Last week, Ms. Merkel extended warm words to Mr. Papandreou on a visit to Berlin, but no offer of financing guarantees, for which Greek officials had been hoping.

On Monday, Mr. Papandreou is scheduled to visit U.S. President Barack Obama in Washington, a trip Greek officials say signals that Greece has friends beyond Europe.

Mr. Papandreou has said European governments’ reluctance to help could force his country to turn to the IMF.

The idea for a European Monetary Fund has been championed by two European economists, Daniel Gros of the Centre for European Policy Studies and Thomas Mayer of Deutsche Bank, who argue the fund could make the euro zone’s crisis management and its commitment to fiscal discipline more credible.

Their idea was for the fund to borrow in financial markets, backed by European governments.

It would also be financed by governments that would pay money into the fund based on how much their budget deficits exceeded the annual ceiling of 3% of gross domestic product and how much their total government debt exceeded the 60% of GDP limit. This would discourage governments from running excessive debt and deficits, they suggest.

—Stephen Fidler contributed to this article.

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