Will Lack of U.S., Canada Support Impede the Eurozone Firewall?

May 5th, 2012
in Op Ed

by Elliott Morss

firewallSMALLWhen it comes to Eurozone solutions, it is interesting how different ideas take hold. The current idea is that if there is a big enough firewall, all will be well. This is the position of IMF head Lagarde and the strong Eurozone countries. So far, there is more than $1 trillion in the Euro firewall, and the IMF is trying to raise more. The US is at best luke-warm and has made no commitment. And just yesterday, Canadian Finance Minister Flaherty said “NO” firewall monies for the Eurozone.

Follow up:

So there is already $1 trillion available plus the $320 billion the IMF has already raised. How will more firewall funding end the Euro crisis? The table below provides a snapshot of the current economic situation in the Eurozone area.

Note the differences within the Euro area. Germany’s GDP is growing and it has a 5.5% unemployment rate. In the other countries listed, GDP is falling which means the unemployment rates of Spain (24.2%), Greece (19.4%) and Portugal (14.4%) will increase further.

Source: IMF

Spain and Greece have huge deficits. Greece and Italy have large government debts. And while Germany is running a current account surplus of 5.2%, the other countries are running large deficits.

Back to the firewall. How exactly will this firewall help eliminate these imbalances? And this in an area that must have the same monetary and fiscal policy for all its countries? It won’t. All the firewall can do is protect the banks.

As I have suggested earlier, these imbalances can only be eliminated if the Euro area is broken up and the countries go back to their own currencies.


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About the Author

elliott-morss-photo1Elliott 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

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