Eurozone Chutzpah and the IMF
LONDON – Eurozone policymakers and politicians are in no doubt: they have done their part to support the currency union’s struggling members by increasing the size of its rescue fund, the European Stability Mechanism (ESM). Now it is time for the rest of the world – that is, the International Monetary Fund – to step up and put additional funds on the table, and European finance ministers are making that case at the IMF/World Bank meetings in Washington.
European officials, in other words, take for granted that the IMF should support the eurozone, as if the rest of the world had some kind of duty to do so. In reality, even if eurozone governments could agree on a much larger increase in the ESM’s size, there are compelling reasons why the IMF should refrain from offering any further support.
Europe’s leaders cannot decide if the eurozone is a federation akin to the United States or a group of independent states. They frequently compare the eurozone favorably to other developed economies.
Eurozone members as a whole, they argue, have a lower budget deficit than the US and the United Kingdom, and a similar level of public debt. Unlike the US and the UK, the eurozone in aggregate is running a current-account surplus (it is, as policymakers like to say, living “within its means”). And they express considerable pride in the euro’s growing role as an international reserve currency, as well as resolve to do whatever it takes to defend the currency union’s integrity.
And yet the same policymakers believe that the rest of the world should bail out the eurozone. When it suits them, the euro is no longer the currency of a highly successful and integrated economy, but a currency shared by a collection of sovereign creditor and debtor countries, and the IMF thus has a responsibility to support the debtor members.
That is an odd position to take, to say the least. Imagine that the US federal government decided that it no longer wanted to support Mississippi and demanded support for that poor southern state from the IMF. The rest of the world – led by the eurozone governments – would rightly turn their backs. Similarly, the IMF is not expected to help India – whose per capita GDP is less than a tenth of eurozone levels – to finance the poverty-stricken states of Bihar and Uttar Pradesh.
The eurozone wants it both ways. Its debtors and creditors are all members of the same, wealthy currency union, whose current-account surplus with the rest of the world means that it is a net exporter of capital (that is, domestic savings exceed domestic investment). Moreover, the eurozone’s strategy for dealing with the crisis implicitly relies on a rising surplus: member states with current-account deficits are under pressure to close them, but creditor countries face no pressure to reduce their surpluses. So, a region that is essentially pursuing a mercantilist strategy now wants the rest of the world to finance it.
Many European leaders believe that the rest of the world owes the eurozone a bailout because the currency union is just an innocent bystander. Despite being well run and fundamentally more stable than other economies, the markets (or “speculators”) are making it impossible for the eurozone’s struggling members to achieve the necessary adjustments. So the eurozone deserves protection from international forces intent on destroying it.
This rationale highlights the core of the problem: the eurozone is institutionally incomplete, and eurozone policymakers continue to blame investors for pointing this out. In every currency union, there are creditor and debtor regions. Just as it is the responsibility of creditor regions in the world’s other currency unions to support the debtor regions (which they do through a variety of means), it is up to the eurozone’s creditor regions to underpin its debtor regions’ solvency. This requires debt mutualization, fiscal transfers between member states, and, of course, federal institutions to give all of this legitimacy.
A second reason given by eurozone policymakers to justify their demand for more IMF support is basically a form of blackmail: the global consequences of a further eurozone crisis would be so grave that the IMF has no choice but to do whatever it can to prevent it. Much poorer countries, and those routinely criticized by eurozone policymakers for their indebtedness (such as the US and the UK), should provide support to a wealthy creditor in order to prevent it from inflicting incalculable damage on the global economy. This is akin to making the rest of the world an offer that it can’t refuse.
The rest of the world has no moral responsibility to support the eurozone, and it should resist European leaders’ efforts to extort that support, which would be tantamount to covert support for its creditor countries. That would be an unjustified use of IMF resources, and would further confirm the suspicion among the world's emerging economies that the IMF is in thrall to Western interests.
The IMF should stick to supporting countries with temporary external-financing problems; a wealthy creditor region that refuses to address its institutional contradictions is not a deserving case. If eurozone governments are unwilling to build the federal institutions needed to stabilize the eurozone, they should either assemble a big enough rescue fund themselves, or accept that the single currency is unworkable in its current form.