Two Points re the Euromess

December 4th, 2011 at 12:02 am

One: The solutions to the problems in the Eurozone, not unlike the jobs problem here, are known: a large fund committed to backstopping the governments and banks holding troubled debt, and managed default by Greece.  Like many here, I’ve criticized the bumbling policy makers of Europe, especially the central bank (the ECB) for failing to lead.

Yet, after spending some time there recently, and talking to some of the policy makers involved, I’m a slight bit more sympathetic—though just a bit: true leadership means you sometimes have to do tough, unpopular things.

But one conversation stuck with me, wherein a German analyst, stressing how deeply unpopular the bailouts are with their electorate, told me in so many words: “we know what we must do; but we have to do it secretly.”  Prime Minister Jean-Claude Juncker of Luxembourg put it this way: “We all know what to do, but we don’t know how to get reelected once we have done it.”

Of course, that’s a main reason you have politically insulated central banks that must play the lender of last resort role in rare moments when that’s precisely…um…the last resort.  But somehow, the ECB has yet to get that memo.

Two: OK, if the ECB won’t step up, what about the International Monetary fund, or IMF?  Howard Schneider’s been writing useful pieces about this in the WaPo, and in this one, he covers what I think could (unfortunately) become a big deal here in the next week or so.

The IMF provides some cover and could play an effective role in channeling loans to the troubled Eurozone economies.  But there’s a nascent movement among US politicians to stop them based on the false belief that  by doing so they’d be protecting US taxpayers from exposure to the European bailouts.

Here’s why that’s almost 100% wrong.

–the claim that the President will go to Congress to ask for more money to lend to the IMF to help Europe is certainly wrong;

–the claim that the loans expose the US to default risk is, of course, not wholly wrong—that’s always been the case since we’ve been a member of the fund.  But it’s extremely unlikely.

The IMF enjoys preferred creditor status—they get paid back first—and it has a long, solid track record of being repaid.  Some of these same noises were made when Argentina received large infusions from the fund, but the country paid their debts back to the IMF before they were due (though Schneider does point out that some African countries are in “protracted arrears”).

In short, in a world of interconnected financial markets and great disparities in wealth, credit, and financial intermediaries, you need an IMF.  We’re a member as we should be, and that implies some credit risk, albeit tiny in this case.  In fact, the US has never lost money on our contributions to the fund, which is pretty remarkable given that the finances of some of places they’ve leant to make Greece look prudent.

European policy makers are having enough success convincing themselves not to solve their problems.  They don’t need any help from our politicians.


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9 comments in reply to "Two Points re the Euromess"

  1. Altoid says:

    Query: is there any significant way in which the central-bank deal struck this week amounts to the Fed acting as euroland’s lender of last resort? Sort of seems that way to me, but then what do I know? So what do you think?

    • EuropeanIw says:

      As far as we understood the transaction: the central banks of a number of countries (US, UK, CH, ECB, Japan and a couple others) convened to help the ECB with currency swaps to try to maintain the liquidity of european and global banks. It is NOT a bailout.

      • Altoid says:

        My understanding is that a lender of last resort makes loans when others aren’t willing to, in order to maintain liquidity. That would necessarily seem to involve lending, through whatever means, to entities that have cash-flow problems or that hold assets insufficient to meet reserve requirements, among other things. Swapping dollars at full value for depreciated assets, well, to me that looks a little lender-of-last-resort-ish. I didn’t say bailout because nobody has been talking about throwing government funds into the breach.

        Just to be clear, imho Andrew Mellon’s advice to liquidate everything isn’t something we should be looking to do. So I don’t have much of a problem with last-resort lending to keep the system afloat. Doing it without restructuring the institutions or changing the rules much, though, is something I do have trouble with.

  2. EuropeanIw says:

    Of course the Europeans “know” what they have to do, and it is even possible to enhance the goals of the ECB without changing the treaties, but Germany has to OK that enhancement, and there lies the problem, they don’t to “fund the countries” especially when it is not theirs. Ther was/is also talk of creating a “European Monetary Fund”, and moreover the EIB has been considered to play a role in “the mess done by the markets”. Thank you world.

  3. David says:

    The barrier to doing the right thing is a perception of moral hazard. If you bail out Greece, what’s to prevent the problem from recurring in a few years? Any pressure to reform the Greek economy disappears as soon as the bailout occurs.

    The current German proposal is to make binding fiscal targets, with real penalties for failure to comply. There are several things wrong with this, though. First, it would require 27 countries to give up a significant amount of sovereignty. At best that will take a long time to pull off. Second, it pretty much dooms the weaker economies to long periods of crushing deflation any time there’s an economic shock. Spain had a budget surplus until their economy collapsed in the crisis. Binding fiscal targets force pro-cyclical behaviors, and will cause a lot of suffering.

    I frankly don’t see a feasible way out of this mess. Greece, Spain, Italy, Ireland all need robust growth to solve their problems. Where is that growth going to come from? I think it is only a matter of time before there is seriously bad civil unrest in the peripheral countries.

  4. Bud Meyers says:

    Your opinion?

    “Mr. Sargent not only analyzed changes in central bankers’ understanding of the relationship between inflation and unemployment, but he also factored in the financial markets’ reaction to changes in policy, and, further, the reaction of the policy makers to the reaction of the markets.”

  5. He Loved Big Brother says:

    There is also a (not unreasonable) belief that the very people who caused this mess through imprudent lending will take advantage of any government/global body lending to personally enrich themselves. The global banking system has created an environment of such utter and reckless irresponsibility that it is now politically impossible to rescure the system by rescuing the banks. The recent disclosure of the huge (and I would suppose justified) lending to Goldman et al in 2008, and the (1) very easy terms (2) profits accruing to the banks resulting from this emergency funding, and (3) the grotesque paydays that remain divorced from any creation of value, has a much stronger resonance in Europe than in the US.

    It is not clear what the outcome should be, but the current path of undemocratic integration and continued support for the people who broke the system has made for a perhaps impossible conundrum

  6. Phil Perspective says:

    Of course, that’s a main reason you have politically insulated central banks that must play the lender of last resort role in rare moments when that’s precisely…um…the last resort.

    Politically insulated when? When was the last time the central banks did anything to help their respective countries as a whole? During the Great Depression? They certainly have not done so since. Why do you think stuff like “End the Fed!!” and other similar sentiments have gained traction?

  7. comma1 says:

    “We all know what to do, but we don’t know how to get reelected once we have done it.”

    How, pray tell, do they expect to get reelected if they implode the world economy and to boot, not out of sheer stupidity but out of straight selfishness?

    Furthermore, do you think Americans will be happy to watch the economy implode because some German politician is being selfish? Unlikely, nor should we be. At some point, if we have not already reached that point, economic incompetence by those in power (whether foreign or not) is no longer a dereliction of duty but an act of transgression toward American interests.