Analysis: Stage is set for Strauss-Kahn and IMF to save Greek tragedy – against EU wishes

TRADITIONALLY, "you should go to the IMF" was not something you would say to friendly neighbours and close allies. Over the past few decades, the International Monetary Fund became associated with excessive fiscal austerity, extreme political insensitivity, and – since the Asian financial crisis of 1997-98 – with an out-and-out stigma.

Countries borrowed from the IMF only under duress, when all else failed – and when there was simply no other way to pay for essential imports. (For Iceland in 2008, for example, the only alternative to IMF financing was to eat locally obtained goods, which mostly means fish).

But the IMF has changed in recent years, largely under the auspices of Dominique Strauss-Kahn, its current managing director. Mr Strauss-Kahn, a former French finance minister and contender for the Socialist nomination for the French presidency, has pushed through changes that allow the IMF to lend without conditions in some circumstances, and to give greater priority to protecting social safety nets (including unemployment benefits and healthcare systems).

Greece has serious problems today. The great opportunities offered by European integration have been largely squandered. And lower interest rates over the past decade – brought down to German levels through Greece being allowed into the eurozone – led to little more than further deficits and a dangerous buildup of government debt.

Germany and France are haggling over a belated support package, but have made it clear Greece must slash public-sector wages and other spending. Greek trade unions know what this means – and are in the streets.

If Greece still had its own currency, everything would be easier. Just as in the case of Britain since 2008, the Greek exchange rate would depreciate sharply. This would lower the cost of labour, restoring competitiveness while also inflating asset prices and thereby helping borrowers who are underwater on their mortgages and other debts.

But, with Greece and other troubled eurozone economies (known to their detractors as the PIIGS: Portugal, Ireland, Italy, Greece, and Spain) having surrendered monetary policy to the European Central Bank (ECB), their currencies cannot fall in this fashion. So Greece – and arguably the PIIGS more generally – are left with the need to curtail demand massively, lower wages, and reduce the public-sector workforce. The last time we saw this kind of precipitate fiscal austerity it contributed directly to the onset of the Great Depression in the 1930s.

This is a situation tailor-made for Mr Strauss-Kahn and the "new IMF" to ride to the rescue.

The IMF was created in the waning days of the Second World War, essentially as a US-West European partnership. Europe retains strong representation at the Fund, and has always chosen its top leader. Yet at this moment of growing European crisis, while there is still time to act, the Fund is confined to the sidelines.

This is partly because German chancellor Angela Merkel, currently manoeuvring to ensure a German is the next head of the ECB, does not want the Fund to become more involved in eurozone policies.

But the real reason is much simpler. When French president Nicolas Sarkozy put forward Mr Strauss-Kahn's name to run the IMF, he meant to park a past and potentially future rival in a faraway place. Then the global financial crisis hit, and Mr Strauss-Kahn was propelled to centre stage.

With France's next presidential election looming in 2012, the last thing Mr Sarkozy now needs is for Mr Strauss-Kahn to play a statesman-like role. We can expect to hear all kinds of misleading excuses from EU sources for excluding the IMF: "the Fund is too American", "Europe must resolve its own problems" and "the IMF is not appropriate to our circumstances". Given the magnitude of the Greek crisis, they will all ring hollow.

The EU's leaders will try hard to keep the IMF at bay. This is not good news for Greece – or for anyone who cares about global financial stability.

• Simon Johnson is a professor at MIT's Sloan School of Management and a former chief economist of the IMF.