The IMF is on a fool’s errand
By Desmond Lachman, a resident fellow at the American Enterprise Institute, who previously served as deputy director in the International Monetary Fund’s Policy Development and Review Department and was a managing director and chief emerging market economic strategist at Salomon Smith Barney. The opinions expressed are his own.
As the euro zone debt crisis spreads to Portugal and Spain, one has to pity Dominique Strauss-Kahn, the IMF’s managing director. For the IMF’s European taskmasters are putting the IMF in the worst of no-win positions on the issue of how to deal with the deepening euro zone debt crisis.
If Strauss-Kahn were to acknowledge, as the markets are now doing, that a number of the countries in the European periphery are insolvent, he risks courting the full wrath and fury of the IMF’s main European shareholders. That’s because those shareholders are rightly fearful that any sovereign debt rescheduling in the periphery right now will trigger contagion and a full blown banking crisis in Europe’s core countries.
Yet if Mr. Strauss-Kahn goes along with the European charade that countries like Greece, Ireland and Portugal can address their major budget deficit and balance of payments problems without a debt restructuring or an exit from the euro, he risks getting the IMF more deeply involved in supporting adjustment programs that are almost certain to end in tears.
An irony of the present European situation is that the IMF has to know from its own experience in countries like Argentina, Ireland and Latvia that draconian budget deficit reduction in a fixed exchange rate system is bound to lead to years of depression and deflation in countries like Greece, Ireland, and Portugal. And with increasingly violent political opposition to austerity now becoming the order of the day across Europe at this very early stage in the adjustment process, the IMF would have to be blind not to recognize the risks that their programs pose for the political fabric of the countries in question.
It is no secret that Strauss-Kahn entertains ambition to become France’s next president. He has to be hoping that the euro-zone debt crisis does not spin out of control before the 2012 French presidential elections. However, the way that market confidence is rapidly eroding for the euro zone’s periphery despite the show of massive international financial support for those countries, it is far from clear that Strauss-Kahn and the IMF can hold Europe’s periphery together till 2012.
Photo caption: Dominique Strauss-Kahn, December 2, 2010. REUTERS/B Mathur