BRUSSELS, Belgium — The European Union bowed to German pressure today and called in the International Monetary Fund (IMF) to help rescue Greece, averting the risk that a financial meltdown in Athens could undermine the euro, but revealing deep weaknesses in Europe's monetary union.
"This is great news for Europe," said Portuguese Prime Minister Jose Socrates at the summit of EU leaders. "This is an accord that really responds to the problem."
Under the plan, the 16 nations in the eurozone will provide the lion's share of bailout funding for Greece; the rest will come from the IMF. No figures were mentioned in today's deal, but EU officials have said the combined EU-IMF loan package could total 22 billion euros, almost half of the total Greece needs this year to keep its economy afloat.
The loans will only kick in if Greece fails to raise the money it needs to keep its economy afloat on the financial markets. However the creation of a fixed EU-IMF contingency mechanism gives Greece an immediate fall-back option should Athens prove unable to find the 20 billion euros it needs to refinance its bloated national debt in April and May.
After months of uncertainty and often acrimonious wrangling within the EU over where money to help Greece should come from, the deal should calm markets and dispel the air of near panic that has hovered over the eurozone amid fears that Athens may default on its debts and spark a crisis that could quickly contaminate other deficit-ridden euro-nations such as Portugal, Spain or Ireland.
However, Germany's persistent refusal to be the chief paymaster of an EU-only rescue plan for the Greeks has dealt a blow to the whole concept of solidarity which is supposed to hold the EU together, and the appeal to the IMF could deal a blow to long-term confidence in the eurozone's ability to sort out its own problems.
France in particular had resisted bringing in the Washington-based IMF, but faced with an important state election on May 9, German Chancellor Angela Merkel was reluctant to go against public opinion in her country by dishing out money to the Greeks.
Successive Greek governments have flouted eurozone rules on sound public finances for years, massaging their accounts to hide the scale of the budget deficit, which was eventually revealed to have hit 12.7 percent of gross domestic product last year. That is the highest in the 11-year history of the eurozone and more than four times the 3 percent limit set by eurozone rules.
In the face of strikes and street protests, the government of Greek Prime Minister George Papandreou, which took office in October, has introduced austerity measures to cut wages and benefits and hike taxes with the aim of bringing the deficit down to 8.7 percent this year. Papandreou complained his efforts have been undermined by the high interest rates that wary private banks have set for loans to Greece. At over 6 percent they are twice the level that Germany pays, and he appealed to Europe to help out.
Although eurozone nations made clear they would expect Greece to pay back any loans they give at interest rates that remain above the currency bloc's average, Papandreou welcomed the agreement.
"Today we reached a very satisfactory decision," he said. "Europe, and Greece along with it, emerge stronger from this crisis."
The leaders also agreed on the need for longer-term measures designed to overcome the eurozone's structural weaknesses. They include toughening procedures for cracking down on nations that run up excessive deficits; greater coordination of economic policy among the member nations; closer surveillance to ensure governments don't allow their finances to spiral out of control and a pre-arranged mechanism for dealing with future crises. A package of such measures should be ready by the end of the year, the leaders said.