Thursday, April 24, 2014
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Eurozone Chutzpah and the IMF

LONDON – Eurozone policymakers and politicians are in no doubt: they have done their part to support the currency union’s struggling members by increasing the size of its rescue fund, the European Stability Mechanism (ESM). Now it is time for the rest of the world – that is, the International Monetary Fund – to step up and put additional funds on the table, and European finance ministers are making that case at the IMF/World Bank meetings in Washington

European officials, in other words, take for granted that the IMF should support the eurozone, as if the rest of the world had some kind of duty to do so. In reality, even if eurozone governments could agree on a much larger increase in the ESM’s size, there are compelling reasons why the IMF should refrain from offering any further support. & & &

Europe’s leaders cannot decide if the eurozone is a federation akin to the United States or a group of independent states. They frequently compare the eurozone favorably to other developed economies.

Eurozone members as a whole, they argue, have a lower budget deficit than the US and the United Kingdom, and a similar level of public debt. Unlike the US and the UK, the eurozone in aggregate is running a current-account surplus (it is, as policymakers like to say, living “within its means”). And they express considerable pride in the euro’s growing role as an international reserve currency, as well as resolve to do whatever it takes to defend the currency union’s integrity.

And yet the same policymakers believe that the rest of the world should bail out the eurozone. When it suits them, the euro is no longer the currency of a highly successful and integrated economy, but a currency shared by a collection of sovereign creditor and debtor countries, and the IMF thus has a responsibility to support the debtor members.

That is an odd position to take, to say the least. Imagine that the US federal government decided that it no longer wanted to support Mississippi and demanded support for that poor southern state from the IMF. The rest of the world – led by the eurozone governments – would rightly turn their backs. Similarly, the IMF is not expected to help India – whose per capita GDP is less than a tenth of eurozone levels – to finance the poverty-stricken states of Bihar and Uttar Pradesh.

The eurozone wants it both ways. Its debtors and creditors are all members of the same, wealthy currency union, whose current-account surplus with the rest of the world means that it is a net exporter of capital (that is, domestic savings exceed domestic investment). Moreover, the eurozone’s strategy for dealing with the crisis implicitly relies on a rising surplus: member states with current-account deficits are under pressure to close them, but creditor countries face no pressure to reduce their surpluses. So, a region that is essentially pursuing a mercantilist strategy now wants the rest of the world to finance it.

Many European leaders believe that the rest of the world owes the eurozone a bailout because the currency union is just an innocent bystander. Despite being well run and fundamentally more stable than other economies, the markets (or “speculators”) are making it impossible for the eurozone’s struggling members to achieve the necessary adjustments. So the eurozone deserves protection from international forces intent on destroying it.

This rationale highlights the core of the problem: the eurozone is institutionally incomplete, and eurozone policymakers continue to blame investors for pointing this out. In every currency union, there are creditor and debtor regions. Just as it is the responsibility of creditor regions in the world’s other currency unions to support the debtor regions (which they do through a variety of means), it is up to the eurozone’s creditor regions to underpin its debtor regions’ solvency. This requires debt mutualization, fiscal transfers between member states, and, of course, federal institutions to give all of this legitimacy.

A second reason given by eurozone policymakers to justify their demand for more IMF support is basically a form of blackmail: the global consequences of a further eurozone crisis would be so grave that the IMF has no choice but to do whatever it can to prevent it. Much poorer countries, and those routinely criticized by eurozone policymakers for their indebtedness (such as the US and the UK), should provide support to a wealthy creditor in order to prevent it from inflicting incalculable damage on the global economy. This is akin to making the rest of the world an offer that it can’t refuse.

The rest of the world has no moral responsibility to support the eurozone, and it should resist European leaders’ efforts to extort that support, which would be tantamount to covert support for its creditor countries. That would be an unjustified use of IMF resources, and would further confirm the suspicion among the world's emerging economies that the IMF is in thrall to Western interests.

The IMF should stick to supporting countries with temporary external-financing problems; a wealthy creditor region that refuses to address its institutional contradictions is not a deserving case. If eurozone governments are unwilling to build the federal institutions needed to stabilize the eurozone, they should either assemble a big enough rescue fund themselves, or accept that the single currency is unworkable in its current form.

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  1. CommentedJonathan Lam

    Eurozone Chutzph and the IMF

    “Eurozone members as a whole, they argue, have a lower budget deficit than the US and the United Kingdom, and a similar level of public debt. Unlike the US and the UK, the eurozone in aggregate is running a current-account surplus (it is, as policymakers like to say, living “within its means”). And they express considerable pride in the euro’s growing role as an international reserve currency, as well as resolve to do whatever it takes to defend the currency union’s integrity.”
    I would agree on the scheme of integrity for the Euro currency union, or it lives ‘within its means’. Then, what went wrong with growth or the future of it? If it is running on 1-2% growth and 20% unemployment in general; perhaps, Mr. Simon Tilford gave a good reason the IMF is not involved in helping India even though its Stricken states of Bihar and Uttar Pradesh is making less than a tenth of the eurozone levels. It is a good point that EU should not drag IMF into assistance of its rescue fund, the European Stability Mechanism (ESM) establishing its the bi-system of rescue fund; I am glad that the other input $430 billion and Japan’s $600 billion pledge. That made a 2 trillion gift to EU. However I would stress the issues of liquidity, solvency, sustainability and competitiveness to the recues of the Southern States like PIIGS, Does it sound much like too big to fall? Or, Do the Southern States really live within its means?

    For much the rescue begins, these rescue funds would help eliminate the debts in the second round of restructuring of the debts. Then, the funds from the Twist would turn into credit and shift into the system like the hot cash; the coming inflation and the exchange rate upgrade would escalate based on the structured inflation from the emerging nations with their upgraded labor cost and transportation cost may strangle the growth of the Southern States more since the budget cut or austerity programs. Eventually, the relief of the write-off some believe the economy would reverse would bring on the stagflation and volatile currency exchange rate when the debt/credit sovereignty accountable is turned over to the credit over to the commercial bank. The days of the global stagflation is not far, and the timing for the 2014 in changing the interest rate to the major central banks or commercial banks may not be equipped sufficiently to void the stagflation after it has stalled off years for the ECB and FED.

    “That would be an unjustified use of IMF resources, and would further confirm the suspicion among the world's emerging economies that the IMF is in thrall to Western interests………..If eurozone governments are unwilling to build the federal institutions needed to stabilize the eurozone, they should either assemble a big enough rescue fund themselves, or accept that the single currency is unworkable in its current form.”
    I still think IMF should not taking the post of insurer like ECB in monitoring the sovereignty debt if its major task is aiding the monetary settlements of the exchange and retribution of the financial, and stabilizing the global monetary finance. By time when stagflation hits or the federation of EU fails, IMF will become the one of the balls being juggled under Ms Largard. It is questionable if IMF is really in thrall to western interest when the changes of the currency exchange must under a new reconstruction. After which, economical growth G20 proposed may not be optimistic as it shows, since the core of inflation had been modified by the merging nation to the restructuring inflation through the hyper labor cost and transportation pricing. The hell break loose as the Piigs run off the fence, when they realize in open competitions, there is less tolerance in sustainability, liquidity, affordability and competitiveness; and resilience comes from social and political if the balance of the financial and development is off.
    The alternative in use another entity like the World Bank or Development Bank to keep the task and responsibility of the insurer under the guidance of the United Nations rather than 54% control of the world Bank by the ECB/FED. Does anyone smell monopoly around here or there? Finally, I stress on the questionable role of the rescue fund in IMF is in thrall of Western interest.
    “The exuberant fertility of the universal will. “ by Friedrich Nietzsche . German philosopher. The Birth of Tragedy (1872).

    May the Buddha bless you?

  2. CommentedZsolt Hermann

    I fully agree with the writer's opinion about the European attitude.
    As the writer says they wanted to get the best of both worlds.
    They set up a superficial fiscal, economical collaboration in order to compete on the financial/economical markets with the US and the Asian countries, but they did not want to create a sound basis for it by building a fully integral structure with full socio-economic integration on a supra-national platform, which is understandable since that is a much more complicated, and sensitive political question.
    Now as the luck of the adventure has run out and the global economy started collapsing, the make up is coming off and it does not mater how stubbornly they try the different virtual, cosmetic financial adjustments, the structure is falling since it has no foundation.
    This is a very important lesson for the whole global world, in our new interconnected, interdependent global network we will have no possibility to solve any of our problems unless we swallow the bitter pill, take on the political, social challenge, and move away from our populist fragmented, polarized, nationalistic worldview and start building a mutually responsible, truly global human structure that can adapt us to the conditions we exist in.

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