The eurozone does not need IMF help

by Kenneth Rogoff

Financial Times
November 4, 2011

With leaders of the Group of 20 leading nations now focusing on the International Monetary Fund as their preferred conduit for any bail-out in the eurozone, it is imperative they ask what concrete purpose the fund’s capital will serve. Unless the IMF is granted considerable power to enforce conditionality at the eurozone level, it is hard to see much benefit in its involvement, aside from providing a fig leaf for large-scale European Central Bank purchases of euro sovereign junk bonds.

All eyes are on the Greek drama, but of course the problem is far deeper and more pervasive. There are at least five key flaws in the eurozone’s present interim design.

First, the Maastricht treaty debt limits were not nearly strict enough, in size or enforcement.

Second, there is no mechanism for large, automatic fiscal transfers that would allow risk to be shared as in a single-country currency. If Europe’s national governments are to have their borrowing sharply restricted, then there must be another mechanism to smooth consumption during recessions. (In theory, financial markets could be used to hedge macroeconomic risk across countries, but in practice there are many obstacles.)

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