It is often said that travel broadens the mind. Not so for finance ministers gathering in Washington DC this week for the spring meeting of the International Monetary Fund and G20. For them, the agenda will seem wearily familiar....
Like a bad penny, the eurozone debt crisis keeps returning, seemingly deliberately to coincide with these international summits. Spain's rapidly deteriorating economic and financial position provides the flash point du jour.
With yields on Spanish government debt again above 6pc, and a couple of crucial bond auctions looming, matters are once more coming to a head. Crushed by repeated austerity programmes, the big southern European economies are sinking back into recession, raising new doubts about their ability to meet fiscal targets.
Discussion will therefore once again focus on the creation of a firewall big enough to provide for more, and even bigger, eurozone bailouts, including Spain and possibly Italy, too. This is proving both difficult to achieve, and misses the point, for it presupposes that the crisis is at heart just a confidence issue that can be solved simply by creating a backstop large enough to convince markets they cannot break the euro.
In fact, the underlying cause of the Europe's travails is much more fundamental – it is the euro itself, which is ripping the Continent apart in an uncorrected balance of payments and consequent debt crisis. European leaders have yet properly to face up to this inconvenient truth. Their project won't and cannot work in its present guise. It therefore seems most unlikely that the latest gathering of international leaders will provide the "Washington moment" Christine Lagarde, the IMF managing director, hopes for – a collective coming together of minds to "seize the moment" and provide lasting solutions.
The eurozone has itself agreed some increase in the size of its bailout funds, but it is still too small to accommodate even a Spanish rescue let alone an Italian one, and it is certainly smaller than the IMF, the US and the UK were hoping for.
That, in turn, makes it harder for the IMF to raise the $600bn of additional funding it was originally demanding to create a wider, international firewall that would supplement the European one. At Davos this year, the talk was of a bailout fund - eurozone and IMF combined - with potential firepower of $2 trillion or more. Only a firewall of this magnitude, it was said, would backstop Spain and Italy against further speculative attack. These hopes now looks like pie in the sky.
In recognition, Madame Lagarde has said in recent weeks that perhaps she doesn't now need the whole of the $600bn originally demanded. Yet she's being somewhat disingenuous in suggesting that this is because the crisis has abated to the degree that she no long requires as much.
The true reason is that she can't raise it. Member nations are understandably reluctant to cough up for a cause whose endgame is still so uncertain.
The US, knowing it could never get enhanced IMF support through Congress, has already said it won't contribute any additional funding, while even the UK is beginning to get cold feet. A previously compliant George Osborne does not believe the conditions he listed a little while back, not least a much bigger European rescue fund, have been met. So the charade continues, casting a pall of uncertainty over all gainful economic activity. No one will invest on the level needed for sustainable growth until things seem clearer. We may have to wait for the crisis to intensify further still, and the G20 meeting of premiers in Mexico next June to come and go, before we see significant movement. Economic collapse in parts of the European periphery is apparently not enough. Progress, it would seem, requires force of circumstance rather more potent than 25pc unemployment in Spain and other such stains on Europe's claim to advanced economy status.
Yet unhappily, the crisis still won't go away, even if and when the institutions are created to bring about the required degree of debt mutualisation, for the problem of widely divergent competitiveness would persist. New imbalances would fast establish themselves, requiring more or less permanent transfers from North to South. Despite the punishing mix of austerity and structural reform being imposed on the South, the idea that Europe's periphery can in time be made as competitive as Germany is just fantasy. Whatever the South does, the North will ensure it remains one step ahead.
As things stand, Germany has a great deal more to lose from any substantive break-up of the euro than to gain. German lending to Spain alone is in the region of €1 trillion. Spanish devaluation could as much as halve the value of these loans, never mind contingent claims and likely further losses resulting from contagion to other parts of the eurozone. There would also be the loss of export competitiveness to content with. Exporting to the periphery at a highly competitive exchange rate is a key part of the German success story.
For all the misery the single currency is inflicting on the South, the costs of allowing the euro to fall apart would for Germany significantly exceed those of keeping it together, at least in the short term. Politically unpalatable though it might seem, socialisation of the periphery's debts might for Germany be a price worth paying. It may even be worth the rather higher rate of inflation that seems inevitable for Germany if the Club Med is ever to return to reasonable levels of growth.
Those who believe the euro will survive, on the basis of reasoned economic argument as opposed to the blind faith that seems to colour much European thinking, tend to do so from this perspective. Germany cannot afford to let the project go and therefore won't. The priority for Germany is to ensure sufficient structural and fiscal reform in the deficit nations to ensure the ongoing transfers are both affordable, and perhaps more importantly, politically acceptable.
It's going to be a close run thing. Both sides are having to accept a degree of punishment neither bargained for when they signed up to monetary union – Germany to permanent transfers, and the South to levels of reform that test the boundaries of democratic acceptability to breaking point. Who blinks first?
With its belly aching over the size of firewalls, the IMF remains firmly stuck in the foothills of this debate. It dare not scale the peaks, for they remain strictly taboo. A Washington moment? I fear it's just more wishful thinking. Like poverty, this is a crisis that seems destined to be always with us...
No comments:
Post a Comment