PARIS — The International Monetary Fund sent a simple message Monday to the Greek people as they struggle to cope with the austerity measures being imposed on them in exchange for a bailout: Prepare for more of the same.
“Consolidation will have to continue,” the I.M.F. said of countries like Greece, Portugal and Ireland that are struggling to close their gaping budget shortfalls. “Continuing fiscal consolidation broadly as planned will support confidence.”
The comments, made in a report after a regular I.M.F. staff mission to the euro zone, come at a sensitive time. Greeks, in particular, are growing increasingly angry about the austerity measures their government has put in place in return for a €110 billion bailout it received a year ago from the fund and European Union countries.
In its report, the I.M.F. also took a broader look at the euro zone and its troubles. It said that if the monetary union is to function, its 17 member states would have to either move toward political union or implement rules that result in tighter cooperation of national budget policies.
Without political union, stronger governance will be “indispensable,” the I.M.F. said. To make a difference, the various policies which are being planned to better coordinate the monitoring of national budgets by other euro zone governments and Brussels “will need to be made more binding and relevant for national decision making,” the report said.
The I.M.F. also said that the debate within Europe about the degree of involvement of the private sector in a second Greek bailout now being discussed was “unproductive.” It said the issue should be settled quickly to avoid the impression that future financial support would be conditional on a voluntary restructuring of debt held by banks and other private-sector investors. The fund has opposed suggestions that the bailout should coincide with private investors being forced to take losses on their Greek debt.
At a news conference in Luxembourg, where he was meeting European ministers, the acting managing director of the fund, John Lipsky, said the I.M.F. would have to be sure that reforms the Greek government has committed to were proceeding before Athens could receive the next slice of aid in the original bailout.
“For a successful review of the existing program with Greece, which means approval of a new disbursement, it requires the I.M.F.’s executive board to conclude that the program is on track and that it is financed,” he was quoted as saying by Reuters.
Greek lawmakers are expected to vote June 28 on a new package of austerity measures designed to increase government revenue after Athens missed fiscal goals it agreed to as part of the bailout it received in 2010.
While the uproar over budget cuts is threatening to topple the Greek government, austerity measures have also brought disquiet in Spain and Portugal. Even in Britain, which is struggling to close a budget gap but which has the highest possible credit rating, plans to raise the retirement age for civil servants have brought the threat of a general strike.
The fund also said that continued financial support for the so-called periphery of the euro zone would still be needed from the core members like Germany and France.
One of the tools created for this — the European Financial Stability Facility — will have to “scale up,” the report said, and there must be a “further extension of its potential uses,” for example, as an instrument to intervene in markets and to guarantee more funding for governments like Greece.
It also suggested ways that the euro zone could move away from its dependence on the banking systems for finance.
“European regulators should welcome and actively support the development of market-based alternatives for corporate finance to reduce the dependency of the euro area economy on the banking system,” it said.
One option might be a new lending facility, operated by the European Central Bank but with the explicit backing of euro zone governments, to help refinance illiquid assets, it said. In general, unconventional monetary measures — a reference to the E.C.B.’s huge program of providing liquidity to banks — should remain in place “until financial market tensions have been addressed,” the I.M.F. said. The results of bank stress tests, expected to be released in July, will provide an important opportunity to begin recapitalizing banks, it said.
The fund also urged the central bank to move “cautiously” as it raises interest rates to counter inflation. It said the E.C.B. should “help limit stress from higher interest rates that could be felt in the periphery.”
A “broadly sound” economic recovery is underway in the region, the fund said, but it also warned that the sovereign debt crisis “threatens to overwhelm this favorable outlook, and much remains to be done to secure a dynamic and resilient monetary union.”
The reforms proposed by the fund are classic free market policies of the kind advocated for years from Brussels, Frankfurt and Washington. These include an “ambitious drive to open up the economy to foreign competition and foreign ownership along program commitments” and privatization.
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