IMF calls for European reforms

Jean-Claude Trichet, left, of the European Central Bank, and the IMF's Dominique Strauss-Kahn listen during a meeting at European Union headquarters in Brussels focused on building a crisis framework.
Jean-Claude Trichet, left, of the European Central Bank, and the IMF's Dominique Strauss-Kahn listen during a meeting at European Union headquarters in Brussels focused on building a crisis framework. (Virginia Mayo/associated Press)
By Howard Schneider and Anthony Faiola
Washington Post Foreign Service
Saturday, March 20, 2010

The International Monetary Fund is pressing Europe to speed and deepen reform of its financial system, urging the continent to act more as a single economy even as disagreement intensified over how to help Greece's troubled government.

In comments Thursday, German officials distanced themselves from the possibility of a European-led bailout of Greece, suggesting that the IMF should provide any last-resort fix for the spending and debt crises in Athens. In a speech to the German Parliament, German Chancellor Angela Merkel even suggested that countries that continually flout European Union budget guidelines -- as Greece has done -- should be removed from the eurozone group of nations that use a common currency, according to Bloomberg News.

On Friday, however, IMF Managing Director Dominique Strauss-Kahn made a direct appeal for European countries to jettison the localized thinking that still governs key parts of the European economy in favor of a continent-wide approach. The debate over national as opposed to "transnational" laws, IMF staff members wrote in a separate analysis, had reached "a breaking point" that the continent's politicians needed to address.

"Modest reforms that maintain a pretense of progress but continue business as usual are not sufficient," Strauss-Kahn said in a speech to the European Commission, arguing that a continued insistence on "home-country control" could jeopardize European economic growth.

"Europe needs a fundamental overhaul of its financial stability architecture," he said.

Although Strauss-Kahn's remarks focused specifically on banking regulations, they come at a time of acute focus on how Europe plans to address problems in Greece, and potentially in Ireland and elsewhere. The continent is also torn over the degree to which the recent economic crisis should lead to more common rules for its economy or toward an every-country-for-itself approach.

Though many common rules exist by virtue of the treaty that established the euro, the crisis in Greece has amplified an underlying disagreement over some still outstanding and fundamental issues, such as how the continent's wealthier and stronger nations should assist weaker neighbors.

Germany is a successful world exporter and runs a steady trade surplus, but the suggestion that it should help bail out deficit-stricken Greece has triggered criticism of that country's overspending, and pressure on the government there to raise taxes, cut wages of public workers and overhaul union work rules.

The debate has direct repercussions for the larger effort to reform the global financial system. Differences of opinion within Europe and between Europe and the United States over financial regulation may make it impossible to coordinate policy among the world's major capital markets, a situation that some economists and analysts think could make another crisis more likely.

It has also laid bare the potential limits of what has been an ambitious effort to integrate Europe politically and economically.

"This is a blow to Europe," said Domenico Lombardi, a senior fellow at the Brookings Institution and a former executive director of the IMF. "It is not just a currency or a monetary union. It is a political project, and if the Europeans do not manage to devise a plan of action and Greece has to resort to the IMF, it is a sign of impotency."

The fact that Strauss-Kahn put such direct recommendations before policymakers in Brussels, Lomardi said, shows the degree to which Europe's internal squabble has global implications. The IMF has typically been called on to help fix problems in developing or less-developed countries, Lombardi said, but now it thinks global economic stability may be threatened as much by decisions taken in Brussels, London and New York.

The fund this year will be doing its first-ever assessment of the U.S. financial sector, Lombardi noted.

Greek Prime Minister George A. Papandreou reiterated on Friday that his country considers an appeal to the IMF "a last resort." Other European officials say it is critical to the stability of the common Euro currency that Greece's problems be solved internally, so Europe won't be stigmatized as unable to manage its own affairs. The currency has declined sharply against the dollar since the depth of Greece's problems were revealed.

At meetings in Europe this week, officials, including those from Germany, -- explored ideas for assisting Greece but failed to approve a detailed program. The country needs to borrow about $75 billion this year to remain solvent.

Faiola reported from London.

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