The European melodrama continues. The European Commission is to publish draft legislation to insulate taxpayers from bailing-out Europe’s sclerotic banks in the future. The plan is to give governments the power to reduce the claims of shareholders and bondholders so that any losses are born by creditors not taxpayers. These changes, if enacted, would ease Mario Draghi’s design for a European banking union. But, as ever with Europe, these changes will come later rather than sooner, as late as 2018 in fact.
These discussions are taking place while another Mediterranean storm appears to be gathering. Moody’s is the latest credit rating agency to sound the alarm: downgrading 6 German banking groups and 3 Austrian banks in the expectation that they will be hit by contagion spreading to Italy and Spain. Meanwhile, stalling manufacturing and employment in China and US, and the contraction of the global money supply, add to the sense of impending danger. Leaders of the G20 and G7 finance ministers have been on the phones these past 24 hours, preparing the ground for yet more talking.
Some countries, though, should shout a little louder than others before we are all engulfed by a European government solvency crisis. This is the view of Treasury Select Committee Chairman and Conservative MP, Andrew Tyrie, who has today published an important paper on the future of the Eurozone for the Centre for Policy Studies. He writes:
There should be no special pleading of sentiment in the IMF, says Tyrie, because it is ‘the only fire brigade in town’, the only international body with sufficient strength to calm the markets and check contagion. It needs to recognise that fact because its credibility (and the credibility of its leader, the ambitious, Christine Lagarde) is in the balance. He writes:‘The IMF’s major non-European members should also speak up. More than three quarters of the voting power in the IMF belongs to these non Euro-area countries. They should instruct the IMF to take a detached view. They may need to watch like hawks to fend off special pleading.’
What are those sustainable choices? Tyrie says that there are three outcomes to the present crisis: ‘deep-seated reform to restore competitiveness’, fiscal transfers, or the exit of weaker countries. Of those options, Tyrie accepts that the latter is increasingly the most likely, but this isn’t necessarily a bad thing. He argues that the IMF should negotiate an orderly Greek exit so that much needed reforms can be introduced in that country, and then across the Eurozone as a whole.‘At the moment the IMF is treating the ECB and the Commission as partners in discussions. This should end. Both European bodies have an existential conflict of interest. The ECB in particular also has a financial conflict, arising from its holdings of government debt and its enormous exposures to the national central banks of the deficit countries in the Euro area… The IMF’s job [under his proposals] would not be to decide among the policy choices but to evaluate them, present them to the Euro area governments, and put pressure on those governments to make a sustainable choice.’
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