Here’s a reversal: For months the discussion in Europe was whether the European Central Bank and the stronger Euro zone members would agree to a bailout for southern European countries. Now the question has turned into whether Spain will agree to take one.
That reversal looms in the background of Wednesday’s news from the International Monetary Fund. The IMF warned of slower growth and bank instability if Europeans can’t agree on a rescue mechanism. Meanwhile IMF chief Christine Lagarde said that whatever the IMF’s role is, a rescue can be accomplished without any direct IMF loans.
Some bailout history makes the subtext clearer here. IMF aid has been associated—in Asia in the 1990s, in Eastern Europe, and in developing countries—with harsh cost-cutting measures. (Note Hungary’s recent rejection of IMF conditions.) Whatever the ultimate value of IMF aid, the IMF has often turned into the scapegoat for domestic suffering. A stigma is associated with international aid, and European countries such as Spain don’t want to be lumped in with poverty-stricken developing nations.
Thus the IMF two-step. On the one hand, IMF monetary and capital markets director Jose Vinals presses for a European solution with “credible conditionality.” On the other, Lagarde waves off the suggestion of direct IMF aid, which voters in Spain associate with failing economies and a loss of sovereignty.
The aim is to come up with a European solution that Spain is willing to accept and the rest of Europe is willing to pay for. The problem is that no matter how delicately the ECB and IMF put it, “conditionality” still sounds like a euphemism for “austerity.” The hardships this will bring about are easy to foresee. The payoff is not.