The IMF released its white paper on Euro-area policy on June 7. The document argued for growth more than austerity. There were road maps for each approach, but these are, as many economists have pointed out, largely contradictory goals. Stimulus means government spending which leads to greater deficits.The IMF analysis also called for programs be put into place immediately to stabilize the region’s banking system. But if there are liquidity problems in the region and possible sovereign debt defaults, the banking and credit systems almost certainly cannot be stable.
One of Europe’s biggest problems pointed out by the IMF is that “divergences in economic performance have been allowed to fester, building up imbalances and leading to the recent dramatic wake-up call from markets.” That assumes that Spain can be Germany and Greece can be France.
At the core of the IMF notion of fiscal policy commonality is the argument that the healthier economies in the alliance can impose their systems on the weaker ones. That means that GDP, deficit, debt, and critical economic mileposts such as unemployment can be brought nearly into line among all the countries.
But the cultural and political system differences in Europe make any plan for real economic unity impossible. Germany, the region’s most financially robust country, will cut its budget by some $96 billion between now and 2014. Nearly 15,000 public workers will be laid off to accomplish that goal. A similar program, albeit smaller, in Greece and Spain may cause massive strikes and threaten the power of the ruling parties.
Germany also has the export engine to fuel growth. It has the manufacturing and intellectual property rights to create markets for its goods overseas. Spain and Greece have almost none of those assets and have to rely heavily on tourism for their economic fortunes. Strikes also tend to send tourists to France.
The Eurozone will never be united beyond currency and bailout fund facilities. The organization may force its weaker members to cut deficits but its remains to be seen what GDP and social repercussions that will cause.
The IMF program for the Eurozone will not work because almost none of the nations in the alliance can mimic the success of Germany and France. Greece and Spain will always be laggards and will have to be treated and funded as such.
Douglas A. McIntyre
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