February 10th, 2012
in Op Ed
by Elliott Morss
The Eurozone situation was bad enough 6 months ago. It is getting worse. Why? Because none of the key players are addressing the fundamental problem the Eurozone is facing: the weak sisters (Greece, Italy, Portugal and Spain) are not now and will never be competitive with Germany et al. This problem will not be resolved until either the weak sisters or Germany et al leave the Eurozone and issue their own currency.
Instead of facing up to this reality, the following is what the key players are doing/saying.
The International Monetary Fund (IMF)
The IMF staff developed an elaborate austerity plan for Greece described in an earlier piece. The plan was intended to make Greece competitive with Germany et al. There were two problems with the plan:
- the austerity plan was so extreme that initial efforts to implement it made things worse (shrinking government revenues/no reduction in the deficit);
- the plan was politically impossible to implement – instead, governments fell and there were riots in the streets.
To its credit, the Fund saw what was happening and gave up on it. This caused a serious rift between the IMF and Germany. What has been the IMF’s response? Nothing from the staff, but Ms. Lagarde has called on Europe to create a much larger “buffer/rainy day” fund. This is of course more of a “put your head in the sand” approach than any effort to resolve the problem.
The European Central Bank (ECB)
The ECB has been a problem from the outset. Instead of serving as a central bank/lender of last resort, it has been more concerned about purchasing assets that will lose value (sovereign debt of the weak sisters) than being a lender of last resort. Recently, given the enormity of the crisis, it has been forced to purchase increasing amounts of sovereign debt. But it continues to worry about the value of the assets it is holding and has resisted taking a “haircut” on its holdings of Greek debt.
And then there is Germany. Germany is in the middle of acting out a morality play on austerity:
- Germany forced the other Euro nations (the UK refused) to accept a treaty to limit government deficits to one percent of GDP. This is of course completely irrelevant to the crisis at hand.
- Germany continues to press for austerity in Greece even after the IMF has given up. The latest German proposal is for some European budget czar to take over in Greece.
This is all lunacy, but Germany presses on.
The Sovereign Debt Holders
What is the latest haircut number? 70%? There are large private investors cruising around like sharks. Some are betting the 70% haircut will stick. Others are betting on a complete default. And others, like most banks holding weak sister debt, will just lose tons of money whatever happens.
The Greek Government (s)
One Greek government has already gone, and the current one is on the ropes. It is trying to get a watered down austerity plan accepted by the Greek unions and people, and it is not going well.
So Where Are We?
Nobody wants to face up to the problem that the weak sisters and Germany cannot effectively compete in global markets using the same currency. German exports will determine the Euro’s value, and the Euro will be too strong for the weak sisters to be able to sell their products on world markets.
So the IMF has effectively given up and is calling on Europe to raise more funds. Germany presses ahead with its austerity morality play. The Greek government fights to survive. And the latest austerity plan will accomplish very little.
Apparently, nobody is trying to resolve this mess. And Italy, Portugal, and Spain are waiting in the wings.
About the Author
Elliott Morss has a broad background in international finance and economics. He holds a Ph.D.in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance