|No IMF role in Europe|
|Tuesday, 24 January 2012 00:00|
Eurozone needs to fix its problems itself
Though IMF managing director Christine Lagarde has been campaigning for enhanced funding to be able to tackle the eurozone crisis, and has met German Chancellor Angela Merkel in this regard, this is essentially a bad idea. Both the US and Canada have done well to oppose it since, as they put it, IMF cannot possibly substitute for a robust euro area firewall. Given that the US would have to foot a considerable part of the bill for an enhanced IMF, it’s unlikely the US President Barack Obama is going to risk this in an election year. The more fundamental reason why the solution has to be a European one is, of course, that the crisis has deepened with Germany’s refusal to accept a larger burden of the restructuring and its insistence that the only acceptable solution is that countries put a hard brake on borrowing and impose budget discipline.
So unless Germany comes around—and it needs to, since it also needs to fund the IMF—there’s little chance of any solution working. As has been pointed out by most analysts, if GDP levels are going to shrink, debt-to-GDP ratios will rise further, making it impossible to raise investor confidence required to finance the hundreds of billions of dollars that are required by European countries to rollover maturing debt. A recent McKinsey study on deleveraging by countries since the Great Depression points out that, with the exception of Ireland (debt-to-GDP is 663%), none of the other crisis countries have debt levels that are higher than those in countries like the UK—at 267%, Greece’s debt-to-GDP levels aren’t too different from Germany’s 278%. So even if one were to assume IMF would be able to get the necessary additional firepower, it will simply not be enough if Germany doesn’t give up its demand for austerity—indeed, chances are IMF’s money will also get exhausted soon enough. An interesting point that comes out of the McKinsey study is that in the case of successful deleveraging like that of Finland and Sweden the major part of deleveraging took place thanks to higher GDP levels, and inflation took care of the rest. Neither look possible under the current set of rules imposed by Germany.