The rescue package for the beleaguered Greeks taking shape in one of the usual iterative compromises between Paris and Berlin has got some interesting twists. Since Greece is in the eurozone, the International Monetary Fund, which is being wheeled in to lend an air of credibility to the whole affair, can’t ask it to do anything on the exchange rate or interest rates. The only tool the Greeks have is to grind down heavily on the fiscal deficit and hope the capital markets like it enough to take them off the path to debt default.
This is an unusual position for the IMF to be in. There have been occasions before when a borrower pretty much had only fiscal policy to rely on, as in the $30bn Brazil rescue in 2002 when the indexing of Brazil’s debt to the dollar or short-term interest rates precluded the use of monetary policy. But a country actually stuck in a monetary union? The only analogy I could think of was the CFA franc zone – an arrangement whereby a bunch of west African countries adopted a common currency linked to the French franc. But Arvind Subramanian of the Peterson Institute here in DC pointed out that the CFA franc had in fact been forced to devalue in 1994 under IMF pressure. Somehow I can’t see the ECB under Trichet, who doesn’t want IMF involvement in Greece anyway, trying to drive down the euro to help out Athens.