What role does the IMF play in the European Debt Crisis?

Causes and Implications

A number of economic misfortunes that started in 2002 created a European fiscal dilemma, including increasing debt experienced by the banks and governments of several European countries. It is believed that the uncontrolled debt led to the fiscal predicament that extended to grave proportions. Currently, at least 16 European countries are in debt. Among the countries most affected are Greece, Spain, Ireland, and Portugal. All of the countries in the Eurozone share a monetary currency called the Euro Dollar and have closely connected economies. Implications that have come about as a result of the Euro debt crisis may include Economic changes in Europe, Government bailouts, Stress to banking systems, and further economic deterioration.

Role of the imf

The IMF could play a very useful role in any comprehensive solution by providing some of the firepower to reassure the markets, and, more importantly, by supplying discipline to the execution of the rescue plans through enforcing conditionality on loan disbursements. The staff of the International Monetary Fund said in its latest assessment that the crisis in the euro area has reached a critical stage, and urged the 17 countries of the Eurozone to remain strongly committed to a vigorous and complete monetary union, including a unified banking system and more fiscal integration. The IMF has offered solutions for short term support to the Eurozone debt crisis with actions such as: * Implementing fiscal consolidation decisively and credibly where market pressure is high, but more gradually elsewhere to help support demand in the region. * Committing to a more accommodative monetary policy for an extended period.

* Recapitalizing the weak banks through direct support from the European Financial Stability Facility and European Stability Mechanism resources, to address the adverse feedback loop between sovereign and banking stress at the national level.

The IMF has also made other useful recommendations to amend the problems facing the Eurozone:

* Determined collective commitment needed
The IMF recognized the importance of the actions that have been taken to resolve the crisis, including the European Central Bank’s special liquidity interventions, the larger European and global firewall, the adoption of the Fiscal Compact, and the national governments’ commitment to fiscal consolidation and debt sustainability.
Low growth rates and rising market stress are hindering the reduction in debt levels, the IMF warned, adding that contagion from further escalation of the crisis would have a substantial global impact, especially on neighboring European economies.

* Higher and more balanced growth
The IMF has also advised that stronger steps toward a complete monetary union require various structural reforms throughout the euro area to raise growth. Such reforms would include reforming job markets to raise labor force participation rates, increasing competitiveness in the tradable goods sectors in Southern Europe, boosting investment in infrastructure and human capital to support growth and employment, reforming product markets to help generate a more responsive services sector and raise overall productivity in Northern Europe.
They also believe that competitive gaps between countries also need to be addressed. To do so, the IMF called for reforming the service sector, lowering unit labor costs, and fostering relative price adjustment between the North and the South with the help of monetary policy.

Conclusion

Although the Eurozone could handle this crisis with its own resources, and clearly carries the key responsibility, there is likely to be a very useful role for the IMF to play. The IMF role in the Eurozone bailouts can assist in reassuring financial markets in that the total resources necessary would truly be available. Most importantly, the IMF is in the best position to impose actions on lending to troubled Eurozone countries, since it is viewed as more indifferent and less political about the situation in Europe than the purely European institutions.