Fasten Your Belts for a Bumpy Economic Ride


IMF Head Christine Lagarde seems to be saying that anyone who expects the Euro to survive has a screw or three loose

This week the IMF has acknowledged that the EuroZone will break up and is demanding that IMF members pour more money after bad.


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Until now, the IMF has been trying to treat the weak members of the EuroZone as sovereign debt areas with their own currency and suggesting that the Euro must survive. This week saw a new and more realistic position, but that hasn’t slowed the IMF demands for more contributions from members. It is being claimed that the US will perform a U turn and, after saying very wisely that the EuroZone needs to dig into its own pockets, Obama is poised to pump at least a further US$128 billion of hard pressed US taxpayers money into the IMF to splurge on the weak members of the EuroZone. Britain is likely to offer less than UK£10 billion because Chancellor Osborne realizes that he has no chance of getting a larger sum through Parliament and any sum above £10 billion would require Parliamentary endorsement.

In France Sarkosi is looking even less likely to win a further term and the alternatives for President are likely to demand a renegotiation of EU and EuroZone membership. The French socialist is ahead in polls and has been boosted by ex-president Chirac’s statement that he will not back his own Party’s candidate Sarkosi and will vote for the socialist candidate. Le Pen is also showing strong support and the possibility continues that she will still be contending in a second round vote the current collapse of the conservative vote could see voters switching to Le Pen, with enough time for this to carry her through to victory. In either case, the potential Presidents have already stated that they would fight the French corner even if it resulted in the end of the Euro. That may be the reason why the French Head of the IMF has started to talk about the Euro ceasing to exist in a matter of months.

In Germany, voters are beginning to firm up against Merkel and her Party which could even see Germany leaving the Euro ahead of Greece.

In Greece civil unrest continues and the looming elections look set to ignite the Greek Euro membership issues and the ejection of the imposed Eurocrat who was forced on the Greeks as Prime Minister.

Italy seems to be in limbo awaiting developments in Spain.

Spain has brought default back on the agenda and seriously unsettled the markets.

Once again the EU house of cards is about to fall.

This time, the IMF is acknowledging that failure is highly probable this year and that it will introduce a new Great Depression that will engulf the global markets.

When BSD first started to identify the risks, there was still time for governments to act. At the core of the problem sat the EU and the EuroZone. Their profligacy and determination to achieve a political union in the disguise of a common currency was always a low probability for success. To effect a solution, action should have been taken 8 years ago and the Euro should never have been driven by anything other than monetary motives, drawing in more countries only as it achieved a stable success. The decision to include the PIIGS (Portugal, Ireland, Italy, Greece and Spain) was always questionable on economic grounds. A slower preparation, and an effective regulatory system might have allowed justification even for Greece at some long future date. As it was, the process was rushed for crude political reasons and the figures had to be falsified. Then, two blind eyes had to be turned to the grossly over extended PIIGS and across most of the rest of the EuroZone. Even Germany followed a less than prudent course.

Since then, Greece has already defaulted on loans with creditors forced to accept massive discounts to walk away with any money. The questions now are – How long before Greece again needs a massive bailout? and How long before Greek voters and protestors force Greece out of the German imposed straight jacket that is ensuring economic contraction and poverty?

What seems to have escaped commentators is that there are a number of economic solutions that do not involve propping up the Euro. Some economists have pointed out for more than two years that a break up of the Euro could be the least painful way to begin rebuilding the global economy. They argue that the markets have already factored in the defaults amongst the PIIGS and some EuroZone economies are basically sound. Cutting away the dead flesh and returning to national sovereign currencies would see the start of sustained recovery in the strongest economies that would begin to pull the weak economies towards recovery and allow an IMF with expanded funds to offer realistic support packages for those economies in real need. In the poorest economies, a return to sovereign currencies would allow the currencies to float until they found their own levels. This would not be painless, but it would offer the prospect of the fastest recoveries and the least pain, providing hope for the hard pressed people of those countries, in place of the current growing desperation and despair.

Maybe the IMF is at last understanding the depth of the threat to the global economy, but there is still no sign that the EuroZone and the Eurocrats even recognize which planet the problem is on. The problem still remains that a failure of the Euro is likely to kill political union and destroy the European Union as we see it today. That may be no bad thing because the world does not need a new and introverted super power wedded to massive and illegal subsidies and trade protectionism.

Although the concerns are still economic, the really significant risks are even greater. Economic depression may be painful but it will pass eventually and countries with basically sound economies and sovereign currencies will always be able to allow those currencies to find their natural level. On that basis there is a strong justification for countries outside the EuroZone to refuse to provide any further help until the EuroZone addresses all of its many problems. Attempts to continue with yet more bailouts will only increase the size of the problem as they have during the last 8 years. The real dangers lie in sudden shocks to emerging new economies. China is already exhibiting signs of major internal political conflict that could destabilize the country and its economy. If that happens a new set of economic tsunami will begin to spread out through world markets and increase the danger of a major war breaking out.


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