Can the IMF Save the European Union

A debt-choked Europe is concentrating its limited economic resources on a floundering Greece. But the nature of the euro is that one country’s economic problem is everyone’s economic problem, and an IMF bailout will detrimentally impact all of the other euro zone players—most notably Ireland, Portugal, and Spain, who are already struggling to keep their heads above water.



IMF has already made loans over the course of the last year that are some of the largest in history. Now they are considering providing the European Union with half of their available euro stabilization fund. This fund will be utilized in the next few months primarily for Greece, whose Socialist government revealed only last April that their public finances were in a much worse state than anyone had expected.

IMF is propping up the EU stabilization fund under the assumption that they will implement a tough austerity program, the idea of which Germany vehemently opposes. Greece in particular has agreed to slash public spending and cut its budget deficit to less than 3 percent of GDP by 2014.

If this EU loan is maximized it will total approximately 194.2 billion, or more SDRs than the IMF’s ten biggest loans in history combined. An SDR, or Special Drawing Right, is the IMF’s unit of account that represents a claim on foreign currencies exchangeable in times of need.

Even though the economic reform has been underway for almost a year now, IMF is not positive that the EU is capable of utilizing their funds efficiently. An IMF spokesman said the organization continues to be hesitant until they know that the emergency bailout program “has sufficient resources and can deploy them in a flexible manner that will provide effective support.”

Ireland is also opposed to the EU’s bailout implementation, and their most recent election reflected it: all of the opposition parties are ran on the platform of fundamentally altering the economic plan for the country. Ireland, as well as euro zone players of similar size and influence, feels comparably helpless in the hands of the banking executives in Brussels, Berlin, and Frankfurt. Ireland was awarded a bailout of 85 billion euros, which made European stocks and the euro plummet and the cost of insuring the debt of Spain and Portugal against default soar to a record high.

Spain continues to hike taxes and slash government spending, which is not faring well with the people and is politically costing those in power. However, as economist Rafael Pampillon concedes: "If they don't do this, then borrowing costs will rise and Spain would be forced into accepting a bailout like Ireland. I don't know what's worse for a government's prestige: changing policy under pressure, or having the EU and IMF intervene directly and take over."

European finance ministers announced on Feb. 14 that they want to double their current lending capacity, an acknowledgement of the current plan’s inadequacy. Increasingly unlikely is one solution that will please everyone, but one thing’s for sure: business-as-usual isn’t working.