WASHINGTON — Leaders in Europe are looking outside the Continent for help solving the longstanding crisis over the euro, but while the International Monetary Fund may be able to help, it will not be the magic wand they seek.
The fund may be asked to assist further as leaders of the 17 European Union nations that use the euro meet to prepare for a summit meeting Thursday and Friday. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France are scheduled to hold talks in Paris on Monday, and U.S. Treasury Secretary Timothy F. Geithner is meeting with Europe's leaders later in the week.
The IMF lacks the resources to create the much-discussed "firewall" to keep interest rates at sustainable levels for troubled eurozone economies; Italy and Spain together have total debts of more than $3.3 trillion, with Italy about to roll over $276 billion in debt over in the next six months and Spain about $150 billion. Just those two rollovers would wipe out the amount the fund has available to lend worldwide, about $400 billion.
A senior Treasury official said that the IMF might provide "additional, spare-tire capacity" by contributing some financing, but that Europe would primarily use its own resources to wrestle down interest rates and keep countries like Spain solvent.
"Europe is rich enough. It is not in net deficit, when you balance out all of the trade deficits and surpluses," says Raghuram Rajan, a professor at the University of Chicago and former chief economist at the IMF. "What Europe needs right now is money that is willing to absorb losses — and the IMF is not going to provide the money that absorbs losses."
Analysts say that Europe will need to provide the bulk of that money itself: through the European Central Bank; the European bailout fund, called the European Financial Stability Facility; or transfers from fiscally sound countries like Germany.
Consideration of how to use IMF resources and expertise started in earnest at the Cannes summit meeting in early November. The final communique ordered finance ministers to develop plans for "deploying a range of various options" for the fund to help bring down borrowing costs.
Some of the options appear to be more likely than others. One is a plan to have eurozone central banks lend money to the IMF. A second plan would have the IMF create new special drawing rights to grant to member countries.