The EU and The IMF: Time for A Bailout?

The EU and The IMF: Time for A Bailout?

Should the IMF bail out relatively wealthy nations?


As the European economy stumbles and falls, European Union leaders are considering asking the International Monetary Fund for a bailout for some of the struggling European nations; the major problem at this point is that the IMF doesn’t have enough reserves itself to lend such a significant amount of money to such a large numbers of countries. At present, the IMF only has $400 billion on hand to loan out, but the amount needed by countries such as Italy and Spain is much, much higher. 

Another problem to the proposed idea of Europe getting bailed out by the I.M.F. is that Europe as a whole is rich enough to take care of its own; many economists from the I.M.F. and beyond believe that the richer European nations should provide the capital to take care of the European countries needing “financial aid” at this point in time. There are many questions about whether the I.M.F. should even lend money to wealthy nations at all. That doesn’t mean, however, that the money wouldn’t be dealt out by the I.M.F; one solution would be solvent EU banks loaning money to the I.M.F. to then dole out to the teetering nations. Money could also be shuffled out of the European Financial Stability Facility. 


A different plan is more complicated at first glance. From the New York Times:


A second plan under discussion would have the I.M.F. create new special drawing rights to grant to member countries. Countries hold the special drawing rights — an i.o.u. with a value based on a basket of major currencies — as reserves and can tap them in case of an emergency.


The EU needs to seriously consider all of the options on the table regarding I.M.F. loans, which are known to come with many strings attached and as the New York Times noted, are often not without significant amounts of pain to the citizens of the country accepting the I.M.F. loan. 


That said, the lure of cash in times of severe economic strain will probably convince the E.U. (and especially the nations who are currently in financial crisis) to remain open to a large variety of proposed solutions from the I.M.F. simply because they have limited options at this point in time. An influx of cash to the depressed nations would probably enable the nations to endure the crisis much more easily in the long term, despite any hardships they may have to endure because of stringent I.M.F. conditions. 


At the same time the EU is considering aid from the I.M.F., U.S. Treasury Secretary Timothy Geithner is planning to go to Europe to press upon EU leaders the need for quick action in response to the financial crisis.