What the IMF can do on Europe

European finance ministers are now acknowledging that there is little prospect that Europe’s own financial rescue fund will grow quickly enough to deal with the spiraling debt crisis. And that realization is leading them to think more intensively about the role the International Monetary Fund can play:

The euro-zone nations “agree to rapidly explore an increase in the reserves of the IMF through the use of bilateral loans,” Jean-Claude Juncker, head of the finance ministers group, said at the end of Tuesday’s meeting in Brussels. Olli Rehn, head of European economic and monetary affairs, said discussions with the IMF were underway and that European nations could be tapped for loans to the agency.

The IMF route has distinct advantages as a way of circumventing some of Europe’s own institutional restrictions and difficult treaty processes. And the comments by Juncker and Rehn suggest that the IMF might be used as a mere conduit for European funds that, for institutional and legal reasons, cannot be channeled through the European Central Bank or the EU structures.

But the IMF is much more than a middle man. Its own rules grant outsiders a decisive say; nothing can get through the IMF’s executive board without Washington’s acquiescence. Thus far, the Obama administration has been cool to a large-scale IMF rescue package for Europe. It’s not hard to see why. Seeking funds from Congress at this moment to bail out Europe would be politically toxic. But allowing Europe and the emerging markets to fashion their own IMF rescue package might mean ceding influence at the Fund, which would have important long-term consequences for Washington. 

With the prospect of an effective European financial firewall appearing so slim, however, there may soon be no palatable alternative to the IMF. Last night, speaking at the French embassy in Washington, former Obama economic advisor Larry Summers agreed that an IMF package may be "salutary" (though he said he could not imagine the administration seeking new funds from Congress anytime soon). He also shed some light on what Washington may want in exchange for agreeing to a larger IMF role. Specifically, he insisted that any broad Eurozone package must be negotiated not with individual Eurozone countries but with the Eurozone as a whole–and, he strongly suggested, with the European Central Bank at the table. In this sense, IMF negotiations would compel the Eurozone and the EU to confront its structural shortcomings rather than circumvent them. 

But how hard a bargain can Washington drive? Key emerging markets are increasingly alarmed by Europe’s trajectory, and if the United States won’t contribute new funds to an IMF package, it may have no choice but to rubber stamp an IMF deal it doesn’t like.