European Union pressure is growing for Greece to "do the right thing" -- which means, to the EU's leaders, a massive and sudden cut in the Greek budget deficit. Greece, without doubt, has gotten itself into a fine mess; still, it is now time for the Greek government to push back more effectively.
Fuming at EU arrogance will accomplish nothing. And, while global investment banks may have helped hide the evidence, it seems unlikely they actually designed the great blunder of eurozone admission (and broken Greek promises). It's time to stop blaming others and get crafty.
Greece should open a semi-official channel to the IMF and talk discretely about taking out a loan.
This is not an anti-Greek suggestion. The IMF has changed a great deal over the past 10 years -- learning lessons and developing new ways of thinking. (For more detail, see my current Project Syndicate column.) Today's IMF would give Greece a much more reasonable deal than would the EU acting alone.
But the main reason to approach the IMF is that this, if done properly, would drive the EU nuts in a most productive manner.
The Germans really do not want more IMF pressure to ease up on European Central Bank monetary policy or -- heaven forbid -- to engage in some fiscal expansion (or other increase in domestic demand). The Germans want to export their way out of recession, and the devil take the hindmost.
And President Sarkozy absolutely does not want the current IMF Managing Director -- Dominique Strauss-Kahn -- to do anything that can be presented as a statesman-like contribution to the world. Strauss-Kahn is a contender for the French presidential election in 2012, so you can see how that works. (Aside: strictly speaking, according to IMF rules, Strauss-Kahn should step down from the Fund; but he is too wily a politician to let anyone push him out at this moment.)
By approaching the IMF, Greece will get a better deal from the European Union. Our baseline view is still that the IMF's role will be only "technical", but behind the scenes the prospect of greater IMF engagement (and even a standby loan) is a powerful card that Greece should threaten to play.
Crossposted with the Baseline Scenario.
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