For Europe, IMF aid may be hard to swallow

By Howard Schneider
Washington Post Foreign Service
Friday, April 16, 2010

The evolving economic problems in Greece have pushed the International Monetary Fund and European leaders into sometimes tense talks over how deeply an agency associated with propping up developing countries should push into one of the developed world's major economic zones -- negotiations that could shape future European economic policy.

Influenced by fundamental issues such as the independence of the European Central Bank, and narrower ones such as whether IMF Managing Director Dominique Strauss-Kahn plans to run for the French presidency next year, the discussion has reflected the economic and political complexity of an IMF bailout near the economic core of the developed world.

The process advanced a step Thursday when Greece, the IMF, the ECB and the European Commission announced that talks would begin Monday over the economic policy changes the IMF would require in return for a multi-year program of loans to help Greek officials restructure. Greece still has not asked for help and maintains that it will try to manage its problems by borrowing on the open market.

But the arrival of the IMF team could well mark the endgame of a process that has had to meld competing agendas into a common plan for keeping Greece solvent. Historically, Europe's relationship with the IMF has been about influence and control rather than negotiating bailout terms: European nations are among the fund's main financial backers, and the managing director is by tradition a European. The new dynamic has been approached with caution.

"We are definitely in terra incognita," said Alamadeo Altafaj, a spokesman for European Commission economic affairs head Olli Rehn. "This is ad hoc for Greece. We are fire-brigading. But beyond that we think we should seize the opportunity" to set stronger economic policies for the 16 nations that share the euro, and establish crisis plans if other countries get into trouble.

By joining the euro zone, countries agree to keep their annual deficits at 3 percent of economic output. In practice, governments routinely ignore those limits, in Greece's case running deficits that topped 12 percent of gross domestic product. Its accumulated debt is well over 100 percent of GDP, and doubts about its ability to pay the bills have raised the possibility of a national default.

European nations have offered their own $40 billion package of emergency loans for Greece -- a fact that in itself represents the continent's conflicted view of IMF involvement. As Greece's problems became apparent, some nations, led by France, argued that the euro zone needed to take care of its own or be stigmatized as unreliable. ECB President Jean-Claude Trichet, meanwhile, worried that IMF involvement might impair the bank's independence in setting monetary policy. While Greece is a small part of the euro area, it was still uncertain what conditions might be set on a bailout, and whether the ECB might be "putting its finger in a machine that could be damaging," said Nicholas Veron, a senior fellow at the Brussels-based Bruegel think tank.

There was speculation as well about how Strauss-Kahn's political plans were affecting the discussions -- whether French officials, for example, wanted to keep the IMF out of Europe to deny him a possible campaign issue.

An economist by training and former French finance minister, Strauss-Kahn ran unsuccessfully for the Socialist Party presidential nomination in 2006 and remains popular in French public opinion polls. He has not spoken publicly about his plans. French political observers say, however, that the recent success of the Socialists in regional elections boosted the standing of party leader Martine Aubry and made it less likely that Strauss-Kahn would be recruited step in.

In addition, a 2011 party primary would force him to soon leave a job in which he is helping engineer the rejuvenation of an agency that before the global financial crisis faced irrelevance in what then seemed a well-tuned global economy.

That greater IMF role has included not just an expansion of the assets that the fund can tap, but now a potentially critical role in the future of Europe.

"All the players at this point want the cooperation to be successful," Veron said. "The IMF is clearly cast as the bad cop. The conditions [set on Greece] will have to be harsh, and they are better poised to be harsh."

Washington Post staff writer Edward Cody in Paris contributed to this report.

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