The IMF's job, in its Article IV country reports, is to fact find, then tell things like they are with a view to making recommendations to promote financial stability and growth. That being the case, its latest report on the European Union was never going to be pretty. The facts are too stark for that. Unfortunately the IMF's mission this go round runs directly counter to the desperate efforts of Europe's politicians to put a positive gloss on the unholy mess that the EU has become. Simply telling things "as they are" in the eurozone context is much like approaching a car that is teetering nose first on the edge of a cliff, seizing the back bumper and lifting and pushing instead of pulling.
The short version of the IMF's 52 page blockbuster report is a simple message: stop messing about and go for full fiscal union now or you're history. Unfortunately, this simple message is politically unviable. It is a pig that won't fly at the national level where the vast majority of people still like the idea of democratically voting for their governments instead of simply having a bunch of Brussels bureaucrats appoint a committee of technocrats to run the United States of Europe.
Of course, opinions can change when things get desperate, and it is theoretically possible that when Europe's home brewed version of the Great Depression really takes hold, the citizens of Europe will look for a technocratic solution, a la Italy. In Italy, after all, Mario Monti - a technocrat's technocrat if ever there was one - has gained considerable kudos for his skilled handling of a near impossible situation. However, one has only to look at regional rebellions for autonomy from national governments - the Basque separatist movement comes instantly to mind here - to see how difficult the road might be for any supra national government of Europe. Yet this is the logical trajectory of the IMF's solution to Europe's current woes.
The IMF, of course, doesn't come right out and call for the immediate formation of a United States of Europe. Instead, it points out very clearly how impossible the euro project is if the member states continue to resist the inevitable consequences of monetary union. "You took the first step, now take the next, or you are well and truly doomed," is the sub-text behind the IMF's report.
Writing in The Telegraph Ambrose Evans-Pritchard has a great deal of serious fun providing a gloss to some key comments from the IMF report. His aim is to bring out just how totally disenchanted the IMF now seems to be with Europe's political leaders. Here is an instance:
The IMF says:
"Adverse feedback loops (between banks and sovereign states) are stronger in a monetary union than elsewhere. These adverse feedback loops are amplified by the absence of a domestic exchange rate that could buffer the impact of intra-euro area sudden stops on the borrowing costs of sovereigns, and that would help compensate the adverse impact of fiscal efforts on domestic demand compression by an exchange rate depreciation stimulating exports."
Evans-Pritchard glosses this as:
"The victim states can’t break out of the trap through devaluation. They cannot offset a fiscal squeeze with exchange (or monetary) stimulus. They are suffocated:"The IMF says:
"... Moreover, sovereign borrowing costs can rapidly spiral out if market anticipations turn out pessimistic, making fiscal adjustment more difficult to achieve unless the monetary authority signals the possibility of future loosening."
Evans-Pritchard glosses this as:
"EMU membership makes it harder to sort out public finances."There is nothing new here, of course. We have all known since Greece's woes became public that EMU membership is a death trap for a country in Greece's predicament. What is new is the IMF standing up and shouting it from the rooftops, so to speak. The euro needs fiscal union so fiscal union must be pursued vigorously. Which brings us back to the problem that there is a very large body of public opinion right across the EU, if surveys are to be believed, which is more than ready to shout back: "Fiscal union over my dead body!" Which should give both the IMF and EU political leaders pause for thought, even as it makes the euro's problems that much more intractable.
Courtesy Anthony Harrington via QFINANCE (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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