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Published on March 7th, 2012 | by Katharina Obermeier
Image © [caption id="" align="alignleft" width="316" caption="European Central Bank © orkomedix"][/caption] Europe has found itself in the awkward situation of a stalemate between the International Monetary Fund (IMF) and the European Union (EU) institutions. Tensions have arisen with the IMF’s Christine Lagarde insisting that European governments enhance the European Stability Mechanism, the new EU bail-out fund, before committing her organisation to further assistance to the eurozone, a call being met with a steadfast refusal from certain eurozone member states. This impasse brings to the forefront a question which economists and political commenters have toyed with since the outbreak of the crisis: is the IMF’s involvement in the eurozone crisis a good idea, or is it even necessary? Of course, the IMF is already involved in the eurozone crisis, for better or for worse. The organisation has a number of programmes in place in Europe, and has provided financing to Greece, Ireland and Portugal. This fact should not come as a surprise to anyone, given that “lender of last resort” is the role the IMF has carved out for itself in the international political economy. It is supposed to be there when private investors and international financial markets turn away, when governments have no other options left to avoid defaulting on their foreign debt. And yet, the eurozone crisis is different. For one thing, it’s happening in present-day Europe, which certainly evokes different connotations in terms of economic stability and financial maturity than the Latin American countries affected by the debt crisis of the 1980s or the then barely-emerging markets of East Asia hit by the financial crisis of 1997. The other factor that differentiates the eurozone crisis is, of course, the EU. Arguably, no other regional organisation in the world would have the political and economic power, not to mention the will, to develop and implement a multi-billion dollar bail-out for its member states in need. The European Stability Mechanism is set to become the new “lender of last resort” for the eurozone, in many ways paralleling IMF activities. In fact, cynics would say that the EU has been following the same blueprint for crisis management that the IMF applied to Mexico and East Asia, offering financial aid in the form of “rescue packages” to avoid a default, which is tied to the imposition of an austerity program. The unpopularity of these austerity programs, implemented in countries such as Greece and Spain, has directed the kind of outrage long aimed at the IMF against the EU. While the EU citizens’ anger is understandable, it would be incorrect to view the EU’s involvement in the crisis merely as an extension of the IMF. The important difference between the organisations is that the IMF moves into a country when it is in crisis, but then pulls out again when the problem has been “fixed”. Contrastingly, the relationship between the EU and its member states is much more comprehensive and permanent, and extends far beyond the issue of financial stability. The fiscal pact just signed by 25 EU member states demonstrates a commitment by all these countries to implement potentially painful measures in order to keep their budgets balanced, indicating a sense of solidarity with their most vulnerable co-members, something that is absent in dealings between IMF donor countries and recipients. Perhaps more importantly, the EU is proving that it can do more than just impose austerity: the European Central Bank has been instrumental in easing pressures in European bond markets, and the European Commission and Parliament are debating proposals aimed at stimulating growth in the eurozone – something the IMF has been accused of neglecting when it bails countries out. This does not necessarily mean that the IMF has no role to play in the eurozone. After all, given certain European governments’ reluctance to increase funds for countries in crisis, the additional firepower of the IMF may well be needed in the near future.  The IMF does hold one distinct advantage in its diverse donor community, meaning it is less prone to the regional “contagion” of the financial crisis than any of the EU member states. Therefore, while the EU institutions are certainly better placed to deal with the eurozone crisis, ending the stalemate with the involvement of the IMF would make everyone feel safer, and indeed less awkward.

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Who Is the Eurozone’s Best Lender of Last Resort?

European Central Bank © orkomedix

Europe has found itself in the awkward situation of a stalemate between the International Monetary Fund (IMF) and the European Union (EU) institutions. Tensions have arisen with the IMF’s Christine Lagarde insisting that European governments enhance the European Stability Mechanism, the new EU bail-out fund, before committing her organisation to further assistance to the eurozone, a call being met with a steadfast refusal from certain eurozone member states. This impasse brings to the forefront a question which economists and political commenters have toyed with since the outbreak of the crisis: is the IMF’s involvement in the eurozone crisis a good idea, or is it even necessary?

Of course, the IMF is already involved in the eurozone crisis, for better or for worse. The organisation has a number of programmes in place in Europe, and has provided financing to Greece, Ireland and Portugal. This fact should not come as a surprise to anyone, given that “lender of last resort” is the role the IMF has carved out for itself in the international political economy. It is supposed to be there when private investors and international financial markets turn away, when governments have no other options left to avoid defaulting on their foreign debt.

And yet, the eurozone crisis is different. For one thing, it’s happening in present-day Europe, which certainly evokes different connotations in terms of economic stability and financial maturity than the Latin American countries affected by the debt crisis of the 1980s or the then barely-emerging markets of East Asia hit by the financial crisis of 1997. The other factor that differentiates the eurozone crisis is, of course, the EU. Arguably, no other regional organisation in the world would have the political and economic power, not to mention the will, to develop and implement a multi-billion dollar bail-out for its member states in need. The European Stability Mechanism is set to become the new “lender of last resort” for the eurozone, in many ways paralleling IMF activities.

In fact, cynics would say that the EU has been following the same blueprint for crisis management that the IMF applied to Mexico and East Asia, offering financial aid in the form of “rescue packages” to avoid a default, which is tied to the imposition of an austerity program. The unpopularity of these austerity programs, implemented in countries such as Greece and Spain, has directed the kind of outrage long aimed at the IMF against the EU.

While the EU citizens’ anger is understandable, it would be incorrect to view the EU’s involvement in the crisis merely as an extension of the IMF. The important difference between the organisations is that the IMF moves into a country when it is in crisis, but then pulls out again when the problem has been “fixed”. Contrastingly, the relationship between the EU and its member states is much more comprehensive and permanent, and extends far beyond the issue of financial stability. The fiscal pact just signed by 25 EU member states demonstrates a commitment by all these countries to implement potentially painful measures in order to keep their budgets balanced, indicating a sense of solidarity with their most vulnerable co-members, something that is absent in dealings between IMF donor countries and recipients. Perhaps more importantly, the EU is proving that it can do more than just impose austerity: the European Central Bank has been instrumental in easing pressures in European bond markets, and the European Commission and Parliament are debating proposals aimed at stimulating growth in the eurozone – something the IMF has been accused of neglecting when it bails countries out.

This does not necessarily mean that the IMF has no role to play in the eurozone. After all, given certain European governments’ reluctance to increase funds for countries in crisis, the additional firepower of the IMF may well be needed in the near future.  The IMF does hold one distinct advantage in its diverse donor community, meaning it is less prone to the regional “contagion” of the financial crisis than any of the EU member states. Therefore, while the EU institutions are certainly better placed to deal with the eurozone crisis, ending the stalemate with the involvement of the IMF would make everyone feel safer, and indeed less awkward.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



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