Opinion

Hugo Dixon

Europe’s self-help

By Hugo Dixon
January 23, 2012

The euro zone shouldn’t rely on a bailout from the rest of the world. The International Monetary Fund is asking for an additional $600 billion to help deal with the euro crisis. But the euro zone, which is vastly richer than most of the rest of the world, should find the money to solve its own problems. It will be bystanders in the developing world that may need help if the euro blows up.

One can see why the IMF wants more money. An additional $600 billion on top of its existing firepower of $390 billion would take it up to a nice round number of $1 trillion. Not only would that give its bosses more swagger as they crisscross the world fighting fires but it would allow the IMF to play a big role in any bailout of a large euro zone country such as Italy.

But why should the rest of the world bail out the euro? The rich normally help the poor. But GDP per capita in the euro zone was $33,819 in 2011, more than five times that in the developing world, according to the IMF. As things stand, 57 percent of the IMF’s existing loans are to the euro zone, according to the Center for Economic and Policy Research. It’s not surprising that other countries are hardly rushing to funnel yet more money its way.

Developing countries need to look after themselves. As the World Bank’s report on Global Economic Prospects highlighted last week, the developing world is already suffering from the euro crisis – mainly because capital flows shrank by 45 percent in the second half of last year compared with the previous year. If the euro blows up, developing country GDP would be knocked by 4.2 percent, it predicts. Some 30 countries, which have external funding needs of more than 10 percent of their income, would be especially vulnerable.

The caution over providing more cash to the IMF is not due only to the fact that relatively poor countries are being asked to help rich ones. The United States and Britain are also reluctant to contribute. This is partly for political reasons: It’s impossible to persuade Congress to cough up money for the IMF in an election year when the U.S. deficit is nearly 10 percent of GDP; and it’s not that easy to get the British parliament, with its large contingent of euroskeptic MPs, to do so either.

There’s also a genuine belief that the euro zone is only in such a twist because of its decision to prevent the European Central Bank from buying national government debt in big quantities. The Federal Reserve and the Bank of England have, after all, bought the equivalent of 15 percent and 18 percent of GDP, respectively, of their own government bonds in an attempt to ward off recession. If the euro zone thinks such money printing will debauch its currency, so be it. But such a holier-than-thou attitude hardly gains sympathy elsewhere.

What’s more, there are alternatives. If Italy needs a rescue, why doesn’t the euro zone double the size of the European Stability Mechanism, its own planned bailout fund, to 1 trillion euros? The answer, of course, is that governments of countries such as Germany would find it hard to persuade their electorates to pour yet more money into southern Europe. But that attitude doesn’t get much sympathy either. Ironically, Germany is on the receiving end of the lectures it is so fond of dishing out to others – just as it tells southern Europe to get its act together, some in the rest of the world are telling the euro zone to solve its own problems.

To be fair, the euro zone hasn’t been sitting on its hands in recent weeks. Italy, for example, has made a promising start under its new prime minister, Mario Monti. And the ECB has been willing to provide unlimited funds to banks – an operation that may indirectly prop up the governments and even weaken, if not debauch, its currency.

To be fair, too, the IMF isn’t asking for cash just to channel from the rest of the world to the euro zone. Not only has the euro zone itself promised $200 billion but also the IMF’s resources could be used to help others caught in the backwash of any euro blowup. What’s more, an expanded war chest might restore investor confidence so much that the crisis recedes, to the benefit of everybody. Finally, the IMF would like the euro zone to beef up its own bailout fund simultaneously.

These arguments are fine as far as they go. But they can be applied with even greater force to the idea of just expanding the euro zone bailout fund. The IMF’s existing resources are perfectly adequate to bail out a raft of even fairly large emerging markets such as Turkey and Egypt. Moreover, if the rest of the world does give the IMF a bazooka, the euro zone will have less incentive to come up with its own. So it makes sense for the rest of the world to keep Europe’s feet to the fire, even if it ultimately helps out a bit. Germany’s Angela Merkel surely understands that logic.

Comments
2 comments so far | RSS Comments RSS

I agree the IMF should not be used to bail out the eurozone.

Perhaps you don’t realize the ECB has just recently started up their “printing presses” and are doing just fine in creating their own bubble without any help from us.

Posted by Gordon2352 | Report as abusive
 

Again an excellent article, Mr. Dixon.

The reason we Northern Europeans are against contributing towards a larger ESM fund is that Italians are even richer than most Europeans. Only Belgen, Luxembourgers and the Dutch are more wealthy. Sorry, but not the Germans. Italian households have around 175% of GDP in net savings -thus free equity – at the bank which amounts to $5 Trillion. Almost twice the entire governmental debt of 120% of GDP. Italy is a G8 country with a productive population that has conservatively saved around 20% of net household income per year. While the Italian – Berlusconi – Government in the last decade has been very supportive towards their population, it is now time the Italians start to take care of their own economic system. Or to cough up higher interest rates via taxes. Such is life.

Mrs. Merkel is a well-informed lady, and her assesment that Germans don’t have to bail out Italians is absolutely fair. When it comes to the IMF, the IMF has always been good for their money. Addtional contribution is an assesment every country can make itself. But one can certainly questions whether Italy should be the IMFs main focus.

Posted by FBreughel1 | Report as abusive
 

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