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Agreed EU Support Model Boosts Confidence, Says IMF

IMF’s Strauss-Kahn welcomed measures by EU, European Central Bank to strengthen economic, financial stability in eurozone (photo: Thomas Lohnes/AFP)

EUROPEAN STABILIZATION MECHANISM

Agreed EU Support Model Boosts Confidence, Says IMF

IMF Survey online

May 11, 2010

  • IMF welcomes EU measures to restore confidence, financial stability in euro area
  • EU, IMF have effective model for future cooperation
  • IMF has adequate resources to help Europe, other members

The European Union’s new stabilization mechanism provides a template for future EU cooperation with the IMF to help support troubled European economies, with Greece acting as a model for joint action, IMF officials said.

IMF Managing Director Dominique Strauss-Kahn has welcomed the weekend measures by the European Community and the European Central Bank (ECB) to strengthen economic and financial stability in the eurozone as a big step forward. European bond markets and the euro have been battered by market concerns about high debt levels in some eurozone countries.

“The IMF will play its part, in the interests of the international community, in addressing the current challenges,” Strauss-Kahn said in a press statement. “In particular, we stand ready to support our European members’ individual adjustment and recovery programs through the design and monitoring of economic measures as well as through financial assistance, when requested, in conjunction with the new European Stabilization Mechanism (ESM).”

Strauss-Kahn said future IMF assistance would be on a country-by-country basis, and broadly in proportion to the IMF’s recent European arrangements (where Fund financing amounted on average to around one-third of total joint financing). Speaking on a visit to Zurich, the IMF chief said the single currency area needed to press ahead with significant reforms and make big efforts to cut budget deficits.

“The crisis is not over, but the response by the eurozone countries showed that they are really committed at the highest political level,” Strauss-Kahn told reporters.

Assessing the implications

The IMF Executive Board approved on May 9 a €30 billion three-year loan for Greece as part of a joint European Union-IMF €110 billion financing package to help the country ride out its debt crisis, revive growth, and modernize the economy.

On May 10, the EU and the ECB adopted an ambitious package of policy measures, including creation of a European Financial Stabilization Mechanism and an ECB program to support securities markets and reactivate temporary liquidity swap lines with the U.S. Federal Reserve.

In a press briefing in Washington, IMF First Deputy Managing Director John Lipsky said the EU measures would strengthen economic and financial stability in the eurozone, improve market functioning and, in turn, boost market confidence. Together with strong implementation by the euro area countries—notably in actions to put public finances on a sustainable path and carry out structural reforms to enhance competitiveness—they will help sustain the global recovery.

He said the IMF was in a strong financial position to provide support to its European members—and indeed to any of its 186 members around the world. In reaction to the global economic crisis, last year, the Fund’s membership pledged to triple its resources—a target that has already been met. In fact the IMF’s resources are in train to reach about $850 billion, once the second round quota increase—approved in 2008—and the IMF’s expanded borrowing arrangements have been finalized. They are in the process of being made effective by member countries.

Long-planned missions

Under long-scheduled arrangements, Lipsky said the IMF would be sending missions to Spain this week and the euro area next week to assess their economic policies under the annual Article IV process. He stressed that the IMF was not in financing discussions with any eurozone country.

Europe’s recent steps, Lipsky said, have clarified that the IMF has a central and key role in dealing with the policy challenges—and potentially also the financial needs—of the eurozone. This underscored the evenhandedness of the IMF, and shows that it has an integral role to play in sustaining economic and financial stability in advanced as well as emerging and developing economies.

Upon request in individual country cases, the IMF is ready to provide financial assistance to its European members in conjunction with the new European Stabilization Mechanism, in support of strong economic programs and using the range of instruments already at its disposal. This would be similar to the co-financing already provided for several of the IMF’s European members (Hungary, Latvia, Romania, and Greece).

The mechanism agreed by European nations on May 10 represents a new way for the EU to finance programs jointly with the IMF, up to a substantial amount. Lipsky emphasized that the IMF has not earmarked a specific amount as financing for the IMF’s European members—and that the Fund’s contribution would be on an as-needed, country-by-country basis.