IMF loses all faith in the euro project

The Telegraph ^ | 7/19/2012 | Ambrose Evans-Pritchard

[bruinbirdman]

The IMF is now the de facto leader of the Eurosceptic movement

The IMF’s latest report on the eurozone is an astonishing document. When the full history of this episode is written, this "Article IV Consultation" will be cited as a key exhibit.

"The euro area crisis has reached a new and critical stage. Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself."

"The adverse links between sovereigns, banks, and the real economy are stronger than ever. Financial markets are increasingly fragmenting along national borders."

It said the eurozone is unworkable in its current form, a half-baked currency union that spreads contagion like wildfire without the backup machinery to contain the damage:

"The euro area is in an uncomfortable and unsustainable halfway point. While it is sufficiently integrated to allow escalating problems in one country to spill over to others, it lacks the economic flexibility or policy tools to deal with these spillovers."

"Crucially, the euro area also lacks essential financial and fiscal policy tools to stabilise the monetary union. As the crisis has illustrated, without a strong common financial stability framework, banking problems are hard to contain and resolve in an integrated market."

Most of southern Europe is at serious risk of a "debt-deflation spiral", and the dangers are masked by the austerity taxes themselves. "This disinflationary environment in much of the periphery will make it difficult for many countries to reduce the burden of debt."

Europe’s leaders have still failed to grasp the nettle:

The deepening of the crisis suggests that its root causes remain unaddressed. The crisis calls for a much stronger collective effort now to

[kitkat]

Could somebody possibly explain in plain words to this fourth grader just what the article means? How did the decline start? How does the EU common currency cause it?

[Caulkhead]

“Could somebody possibly explain in plain words to this fourth grader just what the article means? How did the decline start? How does the EU common currency cause it?”

The problem with the single currency is that it is used by countries with very different economies and governments. The financial needs of a company in Germany is very different to one in Greece yet they are all stuck with the same rules laid down by the European Central Bank, which is of course in Germany and controls things to suit Germany and France primarily. Eurozone countries have no control over their own fiscal levers and they have no lender of last resort so they are effectively at the mercy of the ECB and the markets. Countries not using the euro like the UK can set their own interest rates and control their own money supply which is why although still in debt, they can maintain their low borrowing costs and triple A credit rating.

It really all boils down to trying to create a one-size fits all currency when some of the countries are anorexic and some obese.

[kitkat]

Thank you, Caulkhead. I finally understand.

[Caulkhead]

My pleasure.