The IMF Should Pull The Plug On The Euro
On WSJ MarketWatch, Matthew Lynn argues that the IMF should pull the plug on the euro.
Every financial crisis in the end boils down to one very simple question. Who pays?
The euro debacle has now reached that point. After the G-20 summit in Paris last weekend, there is increasing talk of getting the rest of the world to help bail the single currency out of the mess it finds itself in.
More money should be poured into the International Monetary Fund to help with the rescues, we were told. China and Brazil should step up their purchases of trouble euro-zone bonds.
That is crazy.
In fact, the IMF should pull the plug on the single currency. This is a mess of Europe’s own making. There is no reason to expect the rest of the world to pay for it – and if it does, it will only prolong the agony.
Even by the low standards of ‘grand plans to save the euro’, the scheme cooked up by the G-20 summit in Paris last weekend seem painfully weak. After all the hype and promises of a final fix for the troubled currency, not much of substance emerged.
Something will be done to prop up Europe’s banks, although no one is saying precisely what. Greece should be allowed to default, even though no one quite knows when, or by how much. Something should be done to stop the crisis spreading to Italy or Spain – such as taking the children of bond trader’s hostage and threatening to boil them alive if they don’t stop selling Italian paper.
The one point of substance was that the IMF should contribute more. Christine Lagarde, the IMF’s new managing director, is already calling for an increase in its $390 billion of available funds to help it fund euro-zone bail-outs. If that is agreed, every country in the IMF will have to chip in some more money.
Meanwhile, the BRIC nations are being pressed to help as well. There are reports that the Chinese have become the most active buyers of Spanish and Italian debt, stopping those markets from collapsing. The Chinese are snapping up assets in the privatisations being pushed through by governments in the peripheral countries as they struggle to get their deficits down – offering to buy Athens airport for example. The Brazilians, led by finance minister Guido Mantega, have been actively pushing a co-ordinated global approach to fixing the euro crisis.
Of course, that is understandable in the short-term.
The crisis in the euro-zone is hitting growth right across the world. Markets stand constantly on the brink of a collapse. The banking system looks fragile. If there is one thing we know for sure about the economy it is that confidence is crucial. Right now, uncertainty over the single currency is undermining that.
Everyone has an interest in seeing it resolved.
The trouble is, in the medium-term it is crazy for the IMF to get involved in propping up the euro. In fact, the rest of the world – led by the IMF –should be calling time on the single currency.
First, this is a crisis purely of Europe’s own making. After all, the fundamentals of many of the main European economies are perfectly fine. All of Northern Europe has strong companies, and respectable budget deficits. Public debt across the euro-zone as a whole is not particularly high. It should be the US and the UK that are suffering from the aftermath of the debt bubble of the last decade, not mainland Europe. The euro-zone is in the midst of this crisis because it created a completely dysfunctional monetary system, ignored the imbalances building up within it, and allowed everyone to break the rules. It is a completely self-inflicted wound. There is no reason why taxpayers in Korea or Brazil or the US should have to help fix it.
Second, this will mostly be borrowed money. If the IMF’s funding is increased to help with Europe’s bail-outs, a lot of it will come from the US and the UK. These are countries that already have huge budget deficits of their own. Piling new debts onto counties already staggering under the weight of the old ones is the economics of the madhouse. It makes the situation worse, not better.
Three, more bail-out money is only going to draw out the crisis – since no one seems willing to address its underlying causes. The key problem is that the peripheral countries have suffered a huge loss of competitiveness compared to Germany. True, they could reform their economies to make them a better fit with Northern Europe. But it is hard to push through structural reforms even in the best of times. When your economy is shrinking by 7% a year, like Greece, or by 2.8% a year, like Portugal, it is impossible. The bail-out only addresses the symptoms. If there is no basic cure, more money will be needed next year, and the year after that.
Finally, a euro-zone that is propped up by IMF and BRIC subsidies will be even more unstable than the one we have at the moment. Just think about it. It is hard enough for German politicians to persuade their voters to pay for euro-zone bail-outs. How is it going to be possible to persuade the British, the Canadians, the Mexicans or the Taiwanese? Forget it. Any rescue scheme that depends on the willingness of the rest of the world to pay for this crisis is going to be constantly threatened with being thrown out by angry electors.
There is a useful role the IMF and the BRIC countries can play. Next time there is a G-20 meeting, they could tell Germany’s Chancellor Angela Merkel and the French President Nicolas Sarkozy that the cost of the euro-zone crisis was intolerable. If they made it clear they weren’t willing to throw more good money after bad it would accelerate the break-up of the single currency into more workable currency areas.
Sure, there would be a short-term shock to the system. But in the medium-term, it would be better for everyone.