Following the Greek financial crisis, when the International Monetary Fund appeared reluctant to extend credit to Athens at its greatest moment of need, Europeans led by Germany began formulating plans to create their own monetary fund to replace the IMF in times of crisis.
But after a year of consultations and after Olaf Scholz replaced long-serving German Finance Minister Wolfgang Schäuble, the relationship between Europe and the IMF has improved fundamentally. EU diplomats now say they want the IMF to maintain involvement in the euro-zone economy, and the IMF has responded cordially, even considering $1.6 billion in new aid to Greece.
It’s a far cry from last year, when the IMF gave European finance ministers the cold shoulder in Washington and the EU drafted plans to expand the European Stability Mechanism, which was set up in the wake of the financial crisis, to become a lender of last resort for governments in dire financial straits. EU Commission President Jean-Claude Juncker even said it was time for Europe to take its future “into our own hands.”
“Europe needs the IMF as a firefighter in the event of a major crisis.”
The IMF, whose managing director is former French finance minister Christine Lagarde, seems to have had a serious rethink after the Europeans began planning a separate entity. This became apparent when Ms. Lagarde visited Chancellor Angela Merkel in January, talking in more cordial terms than she did last year.
The change on the European side became evident soon thereafter when interim German Finance Minister Peter Altmaier told other European finance ministers, “The ESM will always be the little brother of the IMF.”
Klaus Regling, head of the ESM, has spent months preparing his agency for an expanded role, which now seems superfluous. Mr. Regling told Handelsblatt that if the IMF would participate in the next bailout program for Greece, “I would welcome that.”
One explanation for the change of attitude is that Europeans realized that they make one-fourth of the contributions to the IMF, so it wouldn’t make sense to exclude the agency from further involvement in a European debt crisis.
The Europeans have also found out just how difficult it is to expand the powers of the EMS into a quasi-monetary fund. There was no agreement on such things as putting the policy change into European law and whether the new European fund would have control of national budgets.
EU finance ministers believe that the EMS with its euro finds could play a role in solving small monetary problems. But in the event of another global financial crisis similar to 2008-2009, they realized they needed the IMF to play a central role in Europe.
“I believe that in the end, the IMF and a European Monetary Fund will coexist and complement each other,” said Axel Dreher, an economics professor at the University of Heidelberg. “The IMF needs Europe as a reliable partner and funder, and Europe needs the IMF as a firefighter in the event of a major crisis.”
Ruth Berschens is Handelsblatt’s bureau chief in Brussels, Martin Greive is a correspondent for Handelsblatt based in Berlin and Jan Hildebrand leads Handelsblatt’s coverage of tax, budget and economic policy. To contact the authors: firstname.lastname@example.org, email@example.com and firstname.lastname@example.org.