European kind of attitude

Europe doesn´t want money from foreigners

A big flow of rescue funds coming from China, the IMF or elsewhere is more harmful than useful for Europe. It would push the Euro exchange rate upwards and make more difficult the way out of the crisis for those countries that are stuck in it.

European policymakers like to remark the strength of the Eurozone. In comparison to the USA it has clearly a lower fiscal deficit ( 4% of GDP in face of 10% of GDP in the USA) and shows, contrary to the USA, no balance of payments deficit.

In other words: the monetary union has enough savings to finance all the budget deficits of its sovereign members and to solve their debt problems.

However, in spite of these strengths, EMU leaders seem unable to reach any solution regarding the sovereign debt crisis. One meeting after another governments chiefs and finance ministers haven´t succeed to calm the markets down. That´s the reason why european policymakers are asking now the IMF and asian investors for help.

This is, in view of the reasons that see the Euro crisis constantly worsening notwithstanding its sufficient financial means, the wrong way to proceed. The main problem is the distribution of savings within the European Union. Countries north of the Alps have an excess of savings but northern savers are not ready to finance indebted southern countries such as Italy, Spain or Greece.

As a consequence of this the risk premium for italian and other southern european nation bonds have risen in the meantime to 5% whereas  Germany can add negative real interest rates to the bonds it issues. The problem behind the problem is the reluctance of northern europeans to invest in their southern neighbours.

The german Government could change this  if it showed itself ready to bail all the debts of Italy , Spain and the rest of the Eurozone. But undestandably Germany doesn´t want to, due to the great risk involved.

The ECB could also help solving the problem by consenting to purchase debt titles that find no buyers in the financial markets. But, like Germany, the ECB is not enthusiastic about the idea. All this ends up in a deadlock and the crisis keeps on worsening.

The world´s most important central banks consented recently to make available more dollar liquidity, mostly indeed to european banks. This has mitigated somewhat the straight liquidity crisis but the underlying debt problem remains considering that the italian Government is not able to refinance itself at reasonable rates.

Owing to the lack of an agreement on an internal solution, european finance ministers are seeking the IMF to put together an extra large financial aid package for Italy. This could certainly prove itself as wishful thinking. Then why would the non european members of the IMF consent  to finance a massif aid program for a G-7 and Eurozne member that hasn´t any problem in his balance of payments and whose public finances are more solid than the ones of many of the developed countries?

A month ago the States and Governments leaders of the Eurozone came up with another way in order to get to foreign funds. The EFSF euro rescue facility could pool euro debts and sell them to foreign investors such as the central banks of China and other asian countries.

The same question arises here: why should China buy italian debt securities that Germany rejects. Even if China was ready to buy special debt securities from the EFSF, it would probably do so in exchange of certain political concessions and an implicit warrant from Germany.

However it doesn´t seem reasonable that Germany pays a political price to do something ( to warrant the debts of another nation) that it has been up to now reluctant to do. The political concessions that China would probably demand – to be recognized by the EU as a market economy or  a greater voting power at the IMF- may be overdue. However it may be, one shouldn´t associate theses issues with the EU´s inability to solve its own problems.

In addition to this a big flow of rescue funds coming from China, the IMF or elsewhere is more harmful than useful for Europe. It would push the Euro exchange rate upwards and make more difficult the way out of the crisis for those countries that are stuck in it.Germany´s growth would manage to deal with a strengthening Euro because german exports are less reliant on prices whereas countries such as Italy or Greece that can´t compete but through prices would be further weakened. European policymakers shouldn´t pass on the solution of the many pressing problems of the Eurozone to foreign countries. Europeans can and must manage the crisis by themselves.

An option being discussed these days consists of a special facility meant to be financed by the main central banks of the ECB and put at disposal of the IMF for it to help Italy and Spain.

By means of this option ECB funds could be used without formally infringing the Lisbon Treaty which forbids the financing of the States over the central banks.

This plan might have the advantage of forcing the Eurozone to look inside itself for its own remedies. But at the same time it would expose ruthlessly the political weakness and the lack of cohesion in the Eurozone.

Should it turn out that a detour over the IMF is needed in order to allow the european central banks to provide with liquidity countries such as Italy and Spain, the rest of the world would ask itself why is it that Europe can´t be more honest with regard to the central role that the ECB plays in this crisis. Good question.

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