WASHINGTON – The eurozone debt crisis is pushing the International Monetary Fund into new, and at times, uncomfortable territory. The global lender is preparing to monitor some of Europe’s largest economies possibly without its biggest weapon – money.
The IMF lacks the financial heft to come to the aid of economies the size of Spain or Italy on its own, even though its monitoring and enforcement role would be in demand.
Can it impose sufficient conditions on a large European country to effect change and preserve its credibility, without any funds?
“One difficulty for the IMF is that, throughout the past two years, in order to maintain the political coalition for bailouts in Europe, they have been prepared to do things that they would never have accepted if they had vantage over it themselves,” said Fredrick Erixon, Director of the Brussels-based European Centre for International Political Economy.
European Central Bank chief Mario Draghi has said IMF help will be sought to both design conditions and monitor programs for euro zone nations that want the ECB to step in to buy their bonds to lower their borrowing costs.
Spanish Prime Minister Mariano Rajoy said last month he has no objection to IMF monitoring, but also insisted he did not want it making fresh demands for a further tightening of Spain’s budget. Spain is widely expected to be the test case for the ECB’s new euro zone rescue plan, and some investors think Italy could follow.
Until the euro zone crisis erupted, most of the IMF’s bailouts focused on emerging economies in Asia and Latin America. Europe’s crisis presents a case much larger and potentially more damaging to the global economy than anything the IMF has previously overseen.
IMF independent oversight offers Europe the credibility it needs to reassure investors that the region is taking the necessary steps to tackle its crisis and that the region is moving in the right direction.
But IMF involvement is politically toxic in Europe. Fund officials, who regularly descend with their European colleagues to check whether bailed-out governments are taking their medicine, have earned the moniker “Men in Black”.
“I don’t know of any example in history where the political leadership or the electorate have been pleased to see the IMF come in to review the books and find out what the governments are doing,” said Erixon.
“It’s even more difficult for Spain and Italy, which are large countries with a political culture or perception that their sovereignty should not be challenged by officials poking their noses into what they’re doing.”
It has escaped no one’s notice that the three governments that had to go cap in hand to the IMF – Greece, Portugal and Ireland – were soon turned out of office by their voters.
The coming months are critical for addressing the euro zone’s problems. IMF and World Bank meetings that kick off in Tokyo next week will focus on whether or not Europe has a handle on the crisis and what more needs to be done. (Reuters)