The IMF helping the euro is feeding the monster on our doorstep
IMF help would set the eurozone on the road to fiscal and political union – let’s not encourage it.
Europe will “receive lessons from nobody” on democracy and the economy, José Manuel Barroso, president of the European Commission, angrily declared at the G20 meeting in Mexico this week.
Whenever a politician petulantly resorts to use of this tired old cliché, you know he’s lost the plot. But, unconsciously, Mr Barroso was making an important point. Viewed collectively, the 17 nations that make up the eurozone are still one of the two richest regions in the world, and on many other measures of economic success – balance of trade, overall size of budget deficit and national debt relative to GDP – they beat the US by a country mile. A visitor from Mars, looking at the aggregate data, would declare the eurozone a model economy.
That it is ripping itself apart, without any obvious solution in sight, is, to put it mildly, a major curiosity. Riches, it seems, cannot buy harmony. In an editorial comment this week on the G20 summit, the German financial daily Handelsblatt put it like this: “It is rather hypocritical when the Americans and the British, whose own mountains of debt have reached a high point, try to lecture the Europeans… At a time when the budget deficits of the US and Great Britain are about 8 per cent, the eurozone members have almost managed to bring their deficits as a whole down to 3 per cent.”
Quite so. Europe is wealthy enough to sort out its own problems. Why is it, then, that the eurozone constantly and shamefully seeks to involve the International Monetary Fund, part-financed by much poorer regions and countries, in its misery? Explain that if you will, Mr Barroso, before refusing to take lessons. He won’t, of course, for he still can’t admit that by imposing the euro on the disfranchised masses, Europe’s leaders have created a doomsday machine from whose clutches they seem ever more powerless to escape.
No one has ever lost money lending to the IMF, the Treasury constantly insists, in justifying the extra $15 billion of funding agreed a few months back. Unfortunately, there is always a first time, and this could well be it. Spain managed to raise a little debt in the markets yesterday, but it had to pay through the nose for the privilege, and it cannot be long now before it is frozen out entirely. City estimates put the consequent bailout at 300 billion euros, on top of 100 billion already agreed for direct recapitalisation of Spanish banks.
Since this would come close to exhausting the capacity of the eurozone’s existing rescue facilities, half the money will have to come from the IMF. Domino theory alone suggests that Italy, requiring an even larger bailout, would follow quickly in Spain’s wake.
None of these eurozone bailouts solves the underlying problem of lost competitiveness, imbalances in trade and banking insolvency; in fact, they may make it worse. By subordinating other debt holders, they threaten permanently to freeze once proud nations out of capital markets, making them into long-term wards – an underling class of sovereign dependants. Both in size and purpose, the IMF is breaking new ground with these bailouts. There is a tangible risk it won’t get its money back.
What’s more, key aspects of the conditionality that traditionally surrounds an IMF programme are missing. One is devaluation to help restore competitiveness. This plainly cannot happen within a monetary union. The ability to force through necessary structural and fiscal reform is also lacking. Greece, and perhaps others too, regard the conditions attached to international money as entirely flexible. They threaten to blow up the whole eurozone, and with it the world economy, if substantial concessions aren’t made.
In lending to the eurozone periphery, it is as if the IMF has lost sight of its core purpose; these latest programmes are more about propping up the single currency than tiding its members over.
As one reader has commented on one of my previous columns, the conditionality that should be applied is either an orderly break-up, with the money used as a kind of Marshall Plan to set sovereigns back on their feet, or rapid movement to federal-style fiscal transfers. In all its wisdom, the IMF must know that these are the only two things capable of solving the problem once and for all. Anything that lies between merely perpetuates the crisis.
Christine Lagarde, managing director of the IMF, would no doubt insist that this is what she is trying to do – protect the world economy from the possibly catastrophic consequences of break-up by gently pushing a reluctant Europe towards fiscal union. The IMF would see its role as helping to ease the transition.
To date, the Government has gone along with this approach. David Cameron has urged Europe to make up or break up. George Osborne has talked of the “remorseless logic” of fiscal union. Like the IMF, they fear for the economic consequences should monetary union break. Bizarrely, they don’t seem to appreciate the contradictions in their position, which is neither principled nor pragmatic. Never would the UK agree for itself the loss of sovereign and democratic protections that full-scale political union would entail.
More than 400 years of British foreign policy has been spent trying to prevent the creation of such a monster on our doorstep. Is this tradition so lightly to be betrayed? It cannot be right to support the emergence of a European superstate that would probably be autocratic in nature. Yet, through the IMF, we seem, ineptly, to be pursuing just such a strategy. If further IMF support for Europe is counterproductive, high-risk and contrary to the long-term national interest, why are we doing it?
By Jeremy Warner in The Daily Telegraph here
Last Updated (Friday, 06 July 2012 10:13)