Both Germany and France have come to an agreement to look to the IMF, writes ARTHUR BEESLEY, European Correspondent, in Brussels
IT WAS late in the afternoon when Angela Merkel yielded, the German chancellor giving her assent to an accord that ties euro-zone governments to a system of emergency bilateral loans for Greece if needed. Reluctant to take this path at all, she finally signed up to the pact during an hour-long meeting with French president Nicolas Sarkozy.
European Commission chief José Manuel Barroso took a big political risk last Friday by calling explicitly for an agreement at the summit. The pact vindicates his strategy and reinforces his authority, although it was always going to be the case that the ultimate burden of the endeavour would rest with countries taking on financial risk.
Six weeks after EU leaders agreed in principle to bypass the no-bailout clause in the EU treaties, they now find themselves going further than many of them would like. Even if Greece never draws down aid from its EU partners, the affair will inexorably lead to closer economic co-ordination and surveillance.
Barroso has already signalled that the EU executive will make proposals along these lines in the coming weeks, drawing from new powers enshrined in the Lisbon Treaty.
Merkel wants to go even further, saying treaty changes will be required to bed down in concrete the requirement for increased surveillance if fiscally austere Berlin is to be called upon to prop up irresponsible Athens.
Views are divided on that. Taoiseach Brian Cowen – mindful of the first Lisbon referendum debacle – seemed less than impressed yesterday when the issue was raised with him. While taking care not to say directly whether cash-strapped Ireland would become a lender to Greece, Cowen laid down strict conditions in case it comes to that. Greece should pay a premium over the interest rate at which countries lending to it borrow, he says.
This view is shared elsewhere in the union, where sharp distaste for propping up the finances of an external government was matched only by concern to prevent a sovereign debt contagion taking hold in the euro zone.
The deal illustrates the force of the Franco-German alliance, which flows like lifeblood through the EU system. But to reach common ground, both Berlin and Paris made key concessions. For Merkel, the very decision to proceed sweeps aside her own personal reservation about an intervention to help an errant euro-zone government. For Sarkozy, tying International Monetary Fund (IMF) financing into the arrangement breaks something of a taboo.
Paris has long clung to the view – shared in Brussels and in Frankfurt, home of the European Central Bank – that financing from the Washington-based IMF would be a demonstration of European impotence. That argument crumbled once Merkel started angling for IMF financing, her stance rooted in the German public’s opposition to any rescue and in the need to be able to defy any challenge in the German constitutional court.
The thinking goes that any system relying exclusively on EU loans could not be seen as a measure of final resort, as the IMF route would always be open to Greece. In any event, officials in Brussels make the point that Europe is the source of roughly one-third of the IMF’s total reserves. This raises the obvious question as to why euro-zone countries should contribute to the fund if they can’t themselves be beneficiaries of its largesse.
Yet work still remains to be done to align the governance of any rescue loans and the conditions attaching to them between the European Commission (which would co-ordinate the provision of emergency credit from EU members) and the IMF (whose own system reserves the right to impose strict policy guidelines on borrowers). Whatever the outcome of that, Merkel’s pact with Sarkozy was the catalyst for the wider system to swing into gear.
European Council president Herman Van Rompuy quickly scheduled an extraordinary meeting of the 16 euro-group leaders before the summit dinner, leaving the 11 leaders of non-euro countries outside the room.
The objective is to put flesh on the bone of a general promise of unspecific aid “if needed” that EU leaders issued last month. That pledge was criticised for its lack of detail, the markets extracting punishment by the day as they drove down the euro’s value.
Although the deal goes further than the February declaration, diplomats and European officials said it does not specify how much each government would provide if Greece asks for help. Indeed, it separates agreement on the mechanism from agreement on its activation. Europe will go thus far at this point, but no further, and everyone hopes they will not have to make good on the promise.