Sarkozy Gets His European Monetary Fund

European leaders on Thursday pushed through a second bailout package for debt-stricken Greece, one which includes a surprisingly high level of private participation. In addition, the euro-zone backstop fund has been given new powers, making it look suspiciously like a European IMF.

Speigel Online International
July 22, 2011

In the end, there were important resolutions to announce after all. Euro-zone heads of state and government agreed on Thursday evening to a second emergency aid package for Greece "and some other things," said German Chancellor Angela Merkel following the special summit of the 17 euro-zone member states in Brussels. She exuded satisfaction and said it had been an "important day."

In the weeks prior to the summit, Merkel had repeatedly insisted that there was no need for the special summit and she made it clear that she was not enthusiastic about participating . As recently as Tuesday, she warned that one should not expect any "spectacular" moves. And the Thursday agreement does indeed fall short of being spectacular , but it provides the clarity that was so badly needed.


The new package provides for €109 billion worth of credit for Athens. The majority of the fund comes from the euro backstop fund known as the European Financial Stability Facility (EFSF) and from the International Monetary Fund (IMF). Private creditors are to contribute an additional €50 billion by 2014 via a combination of debt buybacks and swaps. The level of private involvement in the plan is much higher than had been expected and reflects the position that Germany had been insisting on for months. It can be seen as a personal success for Merkel.

At the same time, the EFSF is to be granted additional, pre-emptive competencies to prevent the euro crisis from spreading to additional countries. Among other measures, the EFSF will have the ability to buy state bonds on secondary markets -- from banks and insurance companies for example -- in order to support debt-ridden euro-zone countries. It is a further step in the direction of the kind of transfer union that Germany has long insisted must be avoided.

A European Monetary Fund
Euro-zone leaders were eager to avoid such bond purchases becoming business-as-usual. Prior to taking such a step, the European Central Bank must identify a country's debt predicament as being extreme and all euro-zone member states must grant their approval. Each national government would hold veto rights. But the new EFSF powers meant that French President Nicolas Sarkozy also had something to celebrate. "We have agreed to create the beginnings of a European Monetary Fund," Sarkozy crowed.

The moves do indeed mean that the EFSF increasingly resembles the Washington-based IMF. It will now be allowed to grant pre-emptive lines of credit to countries under pressure on the financial markets. It will also be allowed to assist in the recapitalization of stricken banks. Even Merkel, who had long been opposed to the idea of a European Monetary Fund, allowed that "one could draw such a comparison" to the IMF.
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