IMF: Act faster, be bolder, and learn from the crisis. This is the International Monetary Fund's advice to Europe ahead of a crucial summit on December 16, when European Union leaders are set to agree at last on a reform of the euro zone's fiscal governance. Europe, thinks the IMF, needs to enlarge its bailout mechanism and give it more flexibility to cope with banking problems, while the European Central Bank should consider stepping up its sovereign bond-buying programme.
The measures are controversial enough amongst euro members, but the IMF's influence is likely to shape the debate's outcome. It could even help the euro zone focus on the steps it needs to take to avoid major fiscal crisis in the future.
Above all, the IMF’s intervention may help end Germany’s relative isolation within the euro zone bloc. This may sound paradoxical, since the IMF advocates what Germany is formally opposing. But by insisting, in sympathy with the longstanding German position, that the euro zone needs the strongest tools for fiscal discipline to help avoid future meltdowns, the IMF has helped design a possible compromise. In the short term, Europe would be more credible if its bailout fund had the means to overcome a major sovereign crisis (in other words, to bail out Spain). But in the mid-to-long term, Europe needs better budgetary coordination and, more urgently, stronger fiscal discipline.
The IMF, along with the ECB, is concerned that this is not the direction the euro zone is taking for now. A deal between Nicolas Sarkozy and Angela Merkel on Oct. 18 watered down earlier proposals for automatic sanctions against wayward governments - a concession made by the German chancellor in exchange for the French president agreeing to her idea of a debt resolution mechanism.
But behind the usual barrage of official statements, there are signs that Germany may be ready to hear what its partners are saying on the need for a more convincing bailout fund. Now it’s up to those partners to show Germany that this would be money well spent, by assuaging its fears that fiscal insouciance will keep being the rule.