The EU should call the IMF now

With the European ‘family’ increasingly at each others' throats, the time is fast approaching for an IMF rescue mission. Cooperation is difficult when old antagonisms are allowed to fester.

The European Union’s desire not to call in the International Monetary Fund to bailout Greece is understandable. It wants to handle what it considers to be a family problem 'inside the family', so to speak.

But sometimes family problems can become so complicated and intractable that outside help is necessary. The Greek crisis may have reached that point, although the Papandreou government has come up with an ambitious reform package to reduce the budget deficit.

The EU’s position on Greece is that it cannot be kicked out, and that there must not be a default on its sovereign debt. This makes a bailout hard to avoid.

Why no default? Because many of Europe’s biggest banks are knee-deep in Greece’s financial paper. Europe’s finance ministers are extremely concerned lest loans to Greece torpedo both the banks and the recovery.

Angela Merkel has to become 'Frau Nein'

Ironically, this fear has had the counter-productive effect of taking away some of the incentive Greek authorities might otherwise have had to bite the bullet in their reform efforts, especially when the 'bite' promises to be a particularly painful one.

The question thus remains: How far can the Papandreou government be expected to go in executing its promised reform package when it knows it has a good deal of leverage over its creditors?

What makes the current situation particularly dangerous and difficult — and why the IMF should be brought in — is that, politically, a European bailout of Greece appears to be fraught with difficulties.

The Germans have a big say in this — and over 70 percent are against a bailout according to recent polls. Indeed, slightly more than 50 percent of Germans want Greece out of the euro altogether, and they are not the only ones.

German chancellor, Angela Merkel, facing an important May election in North Rhine Westphalia (16 million people), does not dare buck the polls on this sensitive point (even though major German banks are at risk). She has no choice but to become 'Frau Nein'.

A 'defeat for Europe'

Yes, the 'experts' are concocting all manner of schemes for a European bailout of Greece — and Germans, in particular, should realise that in bailing out Greece they would be bailing themselves out because of the deep involvement of European banks in Greek sovereign debt.

But the European public is so angry at Greece, it appears willing to bite its nose to spite its face (Greek politicians bringing the Nazis into the brouhaha has not helped). With the European ‘family’ increasingly at each others throats, the time is fast approaching for an IMF rescue mission.

Of course, calling in the IMF would be seen as a 'defeat for Europe', which is why EU politicians are resisting. But the politicians have only themselves to blame for their present quandary. If they had done a better job of educating the public that the euro had so economically bound the members that the old antagonisms were no longer affordable, recourse to outsiders would not be necessary.

Once again, the past is defeating the present. Cooperation is difficult when old antagonisms are allowed to fester.

The US interest

At first, the Obama administration hardly seemed to notice the Greek tragedy playing out in Europe. But it has recently become concerned that the crisis in 'tiny' Greece could rapidly grow into a global crisis because of the involvement of the banks.

The last thing the world, and the US, needs is for Europe to have its own sub-prime crisis. So at this point Washington is not likely to protest at the declining euro, even though it may mean tougher times for US exports and jobs.

To be sure, an IMF bailout of Greece would be no panacea. Moral hazard remains a longer term problem. But, at this particularly vulnerable moment for the global economy, the short term costs of doing the right thing, based on long term considerations, simply cannot be ignored.

We can afford moral hazard problems. We can’t afford a double dip recession — or worse.

Like Lehman Brothers, the Greek crisis can become unglued in a flash. To preempt such a catastrophe, EU authorities must stop their dithering and their misplaced hopes that the Papandreou reforms alone will do the job. How long will the Papandreou government even last? The time to call in the IMF is now, before the crisis explodes in all our faces.