Euro crisis: “It is nice to have a big umbrella…”

The Guardian’s Economics blog starts with an interesting observation

Those who watched Dominique Strauss-Kahn at the spring meeting of the International Monetary Fund a year ago say he played a blinder. Although he was to leave Washington under a cloud shortly afterwards, DSK impressed with his no-nonsense approach to his fellow Europeans.

The IMF‘s managing director asked Jean-Claude Trichet, then president of the European Central Bank (ECB), and Christine Lagarde, at the time France’s finance minister, who they thought they were kidding when they insisted there was no problem in the eurozone.

The case put by Trichet and Lagarde was that the single currency as a whole had low levels of debt, had no current account deficit in aggregate and was not contributing to the imbalances in the global economy. Strauss-Kahn told them to face up to the fact that the single currency was being eaten away by the sovereign debt crisis.

A year on and not much has changed. Lagarde is now doing DSK’s old job at the IMF and perhaps has a better understanding of what he was on about.

Well, perhaps…  The official IMF communiqué is here.  From the BBC report

The IMF’s managing director, Christine Lagarde, welcomed the boost to funds but denied it was earmarked for the eurozone, where the crisis has led to bailouts for Greece, Ireland and Portugal. Some investors fear the crisis could eventually include the much bigger economies of Spain and Italy.

Mrs Lagarde said: “It is nice to have a big umbrella, or a big firewall… and that was really the achievement.”

The US hasn’t contributed this time, but its treasury secretary, Timothy Geithner, still has an opinion

Its treasury secretary, Timothy Geithner, said Europe needed to use imagination and force to fight the continuing debt crisis.

“The success of the next phase of the crisis response will hinge on Europe’s willingness and ability… to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of the markets,” he said.

German finance minister Wolfgang Schaeuble said the region was working hard to make changes.

“This includes labour markets, social security systems, public administrations and financial market institutions,” he said.

[And growth? – Ed]  Back to the Guardian’s Economics blog

The G20 is now a shadow of what it was designed to be – it is both toothless and divided. The only sign of collective action is in Europe, obsessed as it is with austerity. There is no sign of a credible and coherent plan to boost employment and growth, and thus no compelling narrative for the markets.

In the end, the expectation is that Germany’s commitment to the European project will prove so unbreakable that it will swallow its doubts about fiscal transfers, eurobonds and direct lending to troubled banks. Eventually, Germany may be forced to become the equivalent of an IMF for Europe, providing the money for bailouts in return for structural change.

For this to occur, though, there will need to be a real threat that the single currency will break up. The crisis would have to get worse through a combination of stupidity and complacency. As things stand, that is precisely what is going to happen.

As long as they Frau Bundeskanzlerin can avoid the constitutional pitfalls Mick noted recently…

[Or they could just lie? – Ed]  Hmmm…

In the meantime, the Dutch Government baulks collapses at the price of bringing its budget deficit within EU limits by 2013.   As the Irish Times’ Arthur Beesley notes

Although the French presidential election has dominated headlines for weeks, a steadily brewing crisis in The Hague burst into the open on Saturday when the coalition led by prime minister Mark Rutte failed to agree a budget.

The schism may lead to a general election, which would create a months-long political vacuum in an important euro zone country. This is significant for several reasons, the main one being that the debt crisis is already on the way back after a few weeks of relative calm.

Tension is mounting over Spain’s shaky finances and ailing banks. This is reflected in rapidly rising borrowing costs. Prime minister Mariano Rajoy and the EU authorities are finding it difficult to convince doubters that Madrid can survive without a bailout. In this volatile scene, anything that adds to the fragility cannot be welcome. The implosion of the Dutch government does just that.

[Dutch PM resignation tendered – Ed]  And, as I may have mentioned, “the political trilemma” remains unresolved…

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