The Latest Political Accessory: A Crisis Fund

LONDON – George Papandreou's head must be spinning after the weekend.

On Friday the Greek Prime Minister met with German Chancellor Angela Merkel to discuss his country's financial problems, and was said to have left the encounter looking long-faced. German officials had already made clear that they wouldn't open their wallets for Greece, and Merkel must have only repeated the message.

A day later, Papandreou left a meeting with French President Nicolas Sarkozy far more upbeat. Sarkozy had vowed to fight the market "speculators" that were pushing up the Greek government's borrowing costs, and said the euro zone would support Greece through its financial troubles. (See "Sarkozy: Europe Will Stand By Greece.")

Yet one other outcome from the weekend may have left Papandreou a little perplexed.

A spokesman from the European Commission was quoted Monday saying that the Commission has started talking to euro zone representatives about setting up a European crisis fund that would be modeled on the International Monetary Fund and would help improve economic cooperation and monitoring in Europe. This is in spite of the fact that the IMF already has years of experience in quickly and effectively helping indebted countries pull themselves out of big deficits by offering them loans linked to policy changes.

Setting up a European fund would take time and, the Commission says, would not aim to solve the short-term crisis in Greece but act as a means to tackle any future crises on the continent. Concrete proposals on the fund are expected within a few months.

Is such a fund really necessary? Not especially, according to Ivan Tchakarov, an emerging-markets research analyst with Nomura who previously worked as an economist with the IMF. "A European monetary fund is not needed at all as the IMF has all the necessary tools at its disposal to deal with the Greek, or another potential future Greek-like, scenario," he said.

But the E.U. still wants a fund of its own. Touting its creation should temporarily take a little more pressure off the price of credit default swaps, which measure the cost of insuring against a default, on Greek sovereign debt. That would fall in line with French President Nicolas' Sarkozy's pledge to fight against market speculators, since it would show the market that the IMF help would not be the only possible solution to Greece's problems.

Also, if the IMF were to fly in to support a member of the euro zone it could seriously undermine the credibility of the euro, potentially harming the currency's future strength. The proposal is "very much political rather than one based on sound economic principles," said Tchakarov.