EU needed IMF help on Greece

The requirement to bail out Greece could be seen coming from a long way off, but took an unconscionable time to achieve, largely because the European Union (EU) lacks a single agency with the authority to sanction a rescue package.

Under the terms of the Treaty on European Union, commonly referred to as the Maastricht Treaty, there was no provision for a stabilisation fund that could be used to help out ailing members of the eurozone, neither was there a defined role for the European Central Bank in the event of impending financial implosion by an EU member.

Ultimately, the rescue package for Greece had to be arranged with the assistance of the International Monetary Fund (IMF), which chipped in with €30bn of the €110bn three-year bail-out facility, while the rest of the money had to be approved by the individual governments of the members of the eurozone.

It is not as if those who drafted the Maastricht Treaty had not foreseen the possibility of a member country defaulting on its loans, but the idea of giving an agency centralised control of European budgets was deemed politically unacceptable.

Instead, the treaty went down the route of imposing fiscal rules that would discourage member states from letting their finances getting into such a state that hand-outs would be required.

These rules worked reasonably well until what has widely been regarded as the deepest recession since the 1930’s came along and the global banking system teetered on the verge of collapse.

Naturally, the Greek bail-out package came with strings attached, and those strings are held by the IMF, an agency well versed in imposing financial strictures in return for providing funds.

The IMF programme for Greece requires the Mediterranean country transform itself into a lower-wage economy, slash its public sector wage bill and kick off a two-speed wage system to encourage businesses to hire younger people.

The measures were fiercely opposed by many sectors of the Greek public, but from the point of view of Greece’s fellow EU members it was better that the protestors were angry with the IMF rather than the countries in the eurozone, though some collateral damage was obviously taken.