As the EU debates get bitter, the International Monetary Fund is seen as a white knight
EUROPE’S BESIEGED leaders are running out of options and time as they attempt to take the sting out of the debt crisis.
With Italy edging nearer the abyss and Spain not far behind, an air of desperation is palpable as authorities struggle to assert control over the situation.
No one is under any illusion that the single currency’s survival is now at stake. With that comes a question over the viability of the European project as we know it. If the euro stands as the prime exemplar of EU integration, its collapse would undermine, perhaps fatally, the wider process of assimilation.
That’s exactly where we are, however. Two years after the Greek debt explosion and one year after the Republic’s bailout, the crisis has steadily assumed drastic new proportions. The drive to boost the European Financial Stability Facility has fallen well short of expectations, the banking system is in ever-deeper distress and Rome may need external aid within weeks.
Simply put, there is not enough money to rescue Italy. Furthermore, doubt over the willingness of the EU authorities to escalate the response to the emergency serves to fan the flames. More and more the crisis bears down on Europe’s triple-A powers, countries which were supposedly immune from contagion.
So yet another moment of truth looms. Whether this proves to be the ultimate moment remains to be seen, but any attempt to downplay the situation is futile. In Brussels last night, euro zone finance ministers were poised to release a long-delayed €8 billion loan to Greece and €8.5 billion in aid to the Republic. These matters, however, were very much in the minor league.
As far as the most fundamental questions are concerned, no breakthrough seems possible before heads of state and government gather in the city tomorrow week for their final summit of the year. The sense last night was that ministers would have no choice but to kick the trickiest issues further up the line.
The scene is chaotic. Aimless bickering over the role of the European Central Bank and the introduction of eurobonds leaves only uncertainty in its wake. These are bitter debates, pitting risk-averse Germans and the ECB against those who argue for a fundamental revision of the rules of engagement in the euro zone. With little sign of compromise on the horizon, thoughts are rapidly turning to alternative measures.
For some ministers at least, attention is now focused on the International Monetary Fund. In the early days of the crisis, senior Europeans argued that Brussels was no place for the IMF and that its involvement would send a negative signal about the EU’s power to settle its own affairs. Now the Washington-based fund is cast as a white knight.
Various ideas are now in play, all of them stemming from concern that the IMF does not have enough cash in the can to make an intervention in Italy or to follow that up with a plan for Spain.
These include increased contributions from euro zone and non-euro European countries to the IMF, to strengthen its lending capacity. They also include increased contributions from global powers like China and Brazil, who are reluctant to invest in the EFSF but who might just aid the rescue campaign via the IMF.
The most radical suggestion thus far is that the ECB lends to the fund to enable it to lend more into the euro zone. This might well get around the prohibition on direct ECB lending to euro zone governments, but it would lead the bank down the path of becoming a lender of last resort.
Whether ECB support for the IMF could overcome the bank’s innate conservatism must be in doubt.
This is to say nothing of Germany’s resistance to anything approaching the monetary financing of sovereign states. The dogma in Frankfurt and Berlin remains intact.
Look no further than Germany’s Bundesbank president Jens Weidmann, who argues that a wider mandate for the central bank would be akin to drinking sea water to quench thirst.
All of the foregoing, however, illustrates just how serious the situation has become. Gone are the days when ministers talked up their defence of the euro, arguing that the green fields lay just ahead. This is trench warfare now and danger is everywhere. Where it all leads is anyone’s guess.
