Evercore Pan Asset

The IMF approach to saving the Euro is not working. When the IMF lends money to a country struggling with too much debt it usually sanctions a devaluation as well as a government austerity programme. When individual Euro members like Greece and Portugal need to borrow more the IMF says nothing about the value of their currency, as they are locked into the Euro. This means the usual recommendation of a big switch from domestic public and private consumption into exports and investment is more difficult to organise because there is no one off adjustment to competitiveness by devaluation.

This should lead the IMF to ask itself the following questions. Should the IMF be lending more money to over borrowed members of a currency union which contains rich members quite capable of lending the money to their partners if they wish? Can lending more money to a country which has borrowed too much work as a solution to their difficulty? Shouldn’t the IMF keep its financial firepower for poorer countries unencumbered by the single currency architecture? Is there better advice the IMF could send Greece and Portugal?

One of the prime causes of the economic troubles in Euroland is the currency itself. Germany has a currency that suits it well. Germany is very competitive at the current level of the Euro. Greece and Portugal are not. If they are to remain in the same currency they have to become more like Germany in terms of costs and competitiveness.

Parts of the UK and the US are not as competitive as they would like in world markets whilst being in the sterling or dollar currency union. We deal with this problem by sending the poorer parts of our union more money to pay benefits to people out of work or retired, and to support higher levels of public spending generally to give people access to a wider range of free and subsidised public services. Euroland needs a transfer union if it is to maintain its currency union. Taxpayers in the richer and more successful core of France, Germany and Benelux have to send more money to the poorer parts of the Union.

All parts of a single country currency union benefit from borrowing money at the common borrowing rate. Euroland members have to pay very different rates of interest to borrow in the same currency. They need to consider allowing all to borrow at a common rate with all guaranteeing the loan. To reassure the countries currently borrowing at low rates, there will need to be much stronger central controls over how much each country within the Union can borrow.

The IMF should not offer any more bail out money. It should send Euroland an essay on what makes a successful single currency. It would include proposals to strengthen central control over debt and deficits, and measures to ensure a fair transfer of resources and tax revenues around the union to deal with the problems of poorer areas. Appointing another European to head the IMF to carry on lending delays the denouement of the crisis, and just means there will be even more debt piled up which some countries will find it difficult to repay.