With leaders of the Group of 20 leading nations now focusing on the International Monetary Fund as their preferred conduit for any bail-out in the eurozone, it is imperative they ask what concrete purpose the fund’s capital will serve. Unless the IMF is granted considerable power to enforce conditionality at the eurozone level, it is hard to see much benefit in its involvement, aside from providing a fig leaf for large-scale European Central Bank purchases of euro sovereign junk bonds.
Perhaps the situation where outside money might be most useful is in preventing bank runs on solvent countries. Unfortunately, however, the distinction between liquidity and solvency is in practice very difficult to make. In spite of its tough reputation, the IMF far more often misjudged solvency problems for liquidity problems than vice versa. Of course, the fund could be used as an enforcement vehicle for imposing conditionality on the south, but the limits of how much austerity can be prescribed are already being tested throughout the periphery.
The risk of contagion from a Greek default is a palpable one. But G20 leaders need to articulate exactly what the IMF can bring to the table that is not already sitting there in front of a very wealthy, but politically dysfunctional, eurozone system.