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Op-ed: Summit puts future of euro in hands of BCE
Questioned about his plans for long-term economic stability, John Maynard Keynes replied: "In the long run we are all dead." Decades later, Angela Merkel might believe that she has a plan to ensure that the euro survives for many more years. But what can she do to stabilize markets for the near term? Should we really fall back on austerity measures and strangle the credit markets?
Accompanied by her wonted co-crusader Nicolas Sarkozy, the German chancellor told other EU nations that the future of the union lies in a Europe built along the German model. In other words, much in the way of fiscal discipline but little incentive to run the marathon up ahead.
Countries will have to comply with budget restrictions, and this form of austerity will end up devastating the peripheral economies once again, making it difficult for them to meet their financial agreements.
Agreements that come out of the summit will not include any sort of eurobond, debt pooling or collective bank that loans to struggling countries. With respect to providing much-needed liquidity to the states, only two proposals are being discussed and both of them are still incomplete and riddled with doubts.
On the one hand, there are talks of pushing a rigorous recovery plan and raising the debt ceiling, now at 500 billion euros. But the minor inconvenience of this initiative re-raises questions about where we can get the money that we need but Germany is not willing to dish out.
On the other hand, leaders are considering what would happen if each of the EU central banks loaned the IMF up to 200 billion euros and other countries from the international community contributed payments in order to reach a total of 400 billion euros. Brazil's Minister of the Economy is amenable to emerging economies contributing resources. And China announced yesterday that it would establish a 300 billion euro fund to invest in the United States and Europe. China has always been ready to swap financing for trade concessions. The problem with this plan is that once the IMF meddles with a nation's finances, it becomes a creditor of choice that and gets paid before other lenders, which is something that gives pause to investors. Further, the IMF entering the scene will require all debt issues to include debt restructuring clauses.
So when countries are punished by the markets, it will be the European Central Bank's responsibility to come up with the cash to bail them out. It is true that yesterday Draghi affirmed that he is covering the fundamentals of grater fiscal integration deemed necessary should the ECB intervene. My goodness. Only the fundamentals? But Super Mario is toying with a much-pondered uncertainty, which means that he is going to let non-compliant nations continue to sink and the markets continue to apply the pressure. The main problem is that an outlook like this does not provide one of the private sector?s most urgent needs: credit.
The Stability and Growth Pact that Merkel is reinforcing will not answer the background question about how to fuel growth in order to service debt. How can we comply with suffocating sanctions if our economies are already choking to death? These questions give ample room for skepticism.
If nations do not foster growth, the only way to pay down debt lies in inflating the money supply that would weaken the euro in order to benefit the periphery. But this idea threatens the frugal Germans who loaned money to the peripheral countries who are now in trouble. The status quo suits Germany, a country that is currently writing all the rules and backing a plan to save the euro through painful sacrifice. In the near term, only the United Kingdom has resisted the plan. Might we say the same thing for the long term? Only time will tell.