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Europe’s self-help

23 January 2012 By Hugo Dixon

The euro zone shouldn’t rely on a bailout from the rest of the world. The International Monetary Fund is asking for another $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. Another $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 criss-cross the world fighting fires; it would allow it 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/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 report’s on Global Economic Prospects out last week highlighted, they are already suffering from the euro crisis – mainly because capital flows shrank by 45 percent in the second half of last year compared to 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 just down 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 stump up for money for the IMF in an election year when America’s own deficit is nearly 10 percent of GDP; and it’s not that easy to get the British parliament, with its large contingent of eurosceptic 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 and 18 percent of GDP 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; the IMF’s resources could be used to help others caught in the backwash of any euro blow-up. 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.


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