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Europe can’t afford to ignore IMF warning

December 9, 2010

By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON, Dec 8 (Reuters Breakingviews) — Dominique Strauss-Kahn is stepping up his criticism of Europe, and Europe should listen. The director general of the International Monetary Fund is a skilled politician and uses words with caution. He wants the euro zone to adopt a more comprehensive approach to the debt crisis. He says its piecemeal methods have a limited shelf life. This comes after the IMF suggested that the zone’s bailout fund should be enlarged and be more flexible, as Reuters revealed at the weekend.

Strauss-Kahn may have a point, although what he means by a comprehensive approach isn’t clear. He may really be signaling that the IMF isn’t ready to keep funding debt-stricken euro zone members, jumping from crisis to crisis, without seeing some actual reforms.

Strauss-Kahn is already rumored to be facing grumblings from some IMF board members, who feel the fund has embarked on a dangerous path by pledging to write a cheque for half whatever the euro zone puts into a bailout. That commitment extends at least until 2013, when the current European Financial Stability Facility expires. The euro zone then wants to switch to a permanent system, but the IMF hasn’t said whether it would then continue augmenting Europe’s efforts.

The IMF may also run into some political quicksand in Washington, where some in the House Republican majority are protesting against U.S. funds being used to bail out a profligate Europe. The U.S.’s involvement may be indirect, but as the IMF’s dominant shareholder, it is already on the hook for some $12 billion of loans — the implied U.S. share of the IMF aid pledged so far to both Greece and Ireland.

So Strauss-Kahn has to show that the IMF won’t keep spending in vain — which could be the risk if the euro zone’s members failed to agree on a serious reform of their fiscal governance. Stronger discipline to prevent crisis, stricter mechanisms to deal with debtor insolvency: the principles are there, but as to progress on the details it hasn’t gone beyond conflicting sound bites. European Union leaders are supposed to decide on the zone’s future at their summit next week. They must recognise that if they need help from the IMF, they should listen to it.

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