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Eurozone may look toward IMF for debt crisis help

Marketplace Staff Jun 2, 2011

Eurozone may look toward IMF for debt crisis help

Marketplace Staff Jun 2, 2011

Tess Vigeland: The International Monetary Fund is generating copious headlines today. What with the financial bailouts of Greece, Portugal and Ireland, and of course sexual assault charges against its former chief Dominique Strauss-Kahn. France is lobbying for its finance minister — Christine LaGarde — to get that job next.

But it wasn’t too long ago that France, along with many other countries, tagged the IMF as irrelevant. So what’s changed? To find out, we turn to former IMF chief economist Simon Johnson, who wrote about this in the Economix blog of today’s New York Times. Hello.

Simon Johnson: Nice with you.

Vigeland: Give us a little history here: wasn’t it just a few years ago that France and some of these other countries were calling for the downsizing of the IMF?

Johnson: Yes, absolutely. As recently as 2007, France and the rest of the G7 — the big industrial countries — were calling for big cuts at the IMF, and about 20 percent of the staff, including some of their best people, were forced out.

Vigeland: So what is the argument now for involving the IMF in Greece’s debt crisis?

Johnson: Well, it’s a bit strange, to be honest, because Greece is a member of the European Union, and a member of the Eurozone. The Euro is one of the strongest currencies in the world. The countries in the Eurozone don’t really need the money of the IMF. They have deep fiscal pockets, and they have the Euro. But turns out, they would like to use IMF funding to spread the pain.

Vigeland: So after all this coming together with the European Union, now they don’t want the taxpayers of these countries to shoulder the burden?

Johnson: That’s right, or they’d like the shouldering of the burden to be somewhat more opaque and non-transparent. And that’s what happens when the IMF lends. About 30 percent of the money — the equity and the loans which the IMF can access — comes from Europe. But 70 percent of it comes from the rest of the world, including 17 percent from the United States, 17 percent from Japan, 30-some percent from emerging markets. So really what the Europeans are looking for is a subsidy via the IMF from the taxpayers of all the other member countries in the IMF.

Vigeland: Wait, so that 30 percent is the Eurozone paying into the IMF, and then IMF paying it back into the Eurozone? Into Greece?

Johnson: Yes, there is a completely strange round-tripping angle of this. But also more broadly, because the Euro is a reserve currency, because it’s one of the ultimate hard currencies in the world, what the IMF is really doing is raising hard currencies — which call that Euros, because dollar becomes Euro very easily and quickly — and lending them to the Eurozone countries.

Vigeland: How does that affect lending to countries that are outside the EU?

Johnson: Well, it may have some effect, depending on how the IMF does with regard to its overall resources. If the Eurozone situation continues down the path that I would expect, with very big generous packages being handed to, again, or re-done for Greece, Ireland or Portugal, I think the IMF’s going to need to raise more money. In other words, come around and ask the U.S. taxpayer for another contribution. And if they get those other contributions, then the lending to other places that are in trouble, like Egypt or Pakistan or Tunisia, will not be constrained. If the overall amount of resources doesn’t change, then it’s going to be tight for other countries.

Vigeland: What if the IMF were not involved in bailing out EU member nations? What is the worst case scenario for the EU at that point?

Johnson: I think the EU would take care of its own problems. I really don’t think they’re going to have chaos there; I don’t think they’re going to panic the markets — there’s too much at stake. They would have to face the fiscal costs more directly. The German, French and other taxpayers would have to be confronted. And of course they wouldn’t be happy, and they might throw out some politicians, hence the desire of European politicians to somewhat disguise what’s actually going on.

Vigeland: So the chances of that happening are?

Johnson: Look, the French are going to regain control of the IMF — well they haven’t really lost control; Mr. Strauss-Kahn is out, but Mme. Christine LaGarde is almost certainly going to become the next managing director — and they will make sure that the IMF is at the table with some generous money. By the way, I should stress: this is not a great deal for Greek citizens; they are still going to be very hard-pressed. It’s a good deal mostly for the European creditors of Greece.

Vigeland: Simon Johnson, thanks so much for joining us.

Johnson: My pleasure.

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