Political wrangling at this weekend's meetings of the IMF and G-20 in Washington, has deepened divisions between national leaders and pushed the eurozone closer to a breakup. Germany and the United States are increasingly at loggerheads over a strategy that will ease the credit crunch and strengthen the capital-position of EU banks and sovereigns.
The US approach -- which is being pushed by Treasury Secretary Timothy Geithner -- would leverage the existing 440 billion euro financial emergency fund (EFSF) by 5x or 10x, making it big enough to prop up the bond markets of both Spain and Italy. But Germany opposes the idea stressing that such a plan would make "state financing through monetary policy" a permanent fixture. Judging by the way the TARP was administered after Lehman Brothers flopped, the Germans have a point. None of the big banks were nationalized or restructured; their shareholders were not wiped out nor did their bondholders face haircuts. The TARP was merely a transfer of wealth from taxpayers to bankers. Naturally, Germany wants to avoid that.
The Telegraph reports that the main players are working on a secret plan to save the euro. Here's an excerpt from the article:
"German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone's sovereign debt crisis is spiralling out of control.
"According to sources, progress has been made at the G20 meeting in Washington ... the world's leading economies set themselves a six-week deadline to resolve the crisis -- to unveil a solution by the G20 summit in Cannes on November 4.
"First, Europe's banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis....
"The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain's financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target..." (Multi-trillion plan to save the eurozone being prepared, Telegraph)
An expansion of the EU emergency fund to $2 trillion euros is an impossible obstacle for German
Chancellor Angela Merkel to hurdle. She already faces stiff resistance
in-and-out of her party as well as impressive legal challenges from
opposition groups. Germans want to stay in the eurozone, but they are
overwhelmingly opposed to more bailouts or setting up a transfer union that distributes wealth to deficit countries in the south.
In other words, Merkel's hands are tied. Unlike the Fed -- that can simply invoke an obscure clause in its charter ("unusual and exigent") to underwrite the entire financial system with $11.4 trillion in loans and other guarantees -- Merkel has to comply to the law making sure she does not exceed her mandate. That means that the emergency fund will remain within its present range and its impact on the banking system and bond markets will be limited.
But an emergency fund with limited resources will merely embolden the bond vigilantes to push up yields and make it more difficult for cash-strapped states to finance government operations. That, in turn, will lead to more layoffs, more belt-tightening and bigger deficits. It's a vicious circle and the downward spiral is already visible wherever these Dark Ages policies have been implemented. The eurozone is slipping inexorably into another Depression.
This is from Reuters:
"Euro zone officials played down reports on Monday of emerging plans to halve Greece's debts and recapitalize European banks to cope with the fallout, stressing that no such scheme is yet on the table.
"Europe came under fierce pressure from the United States and other major economies at weekend talks in Washington to take swift, decisive action to stop the Greek debt crisis engulfing bigger euro zone states and derailing world economic recovery.
"But officials said media reports that planning was already in place for a 50 percent writedown in Greek debt and a vast increase in the euro zone rescue fund, the EFSF, were highly premature.
"There is no change to the framework we are working on," said a euro zone official who is involved in decision-making on financial assistance to Greece, Ireland and Portugal.
"All this talk of a specific haircut for Greece or an enlargement of the EFSF, it is all just speculation. We are not working along those lines," said the official." (Euro zone damps talk of rapid debt crisis steps, Reuters)
So, while EU finance ministers smiled and played nice to their US hosts at the meetings in Washington, they have no intention of following Geithners' advice. There will be no blank checks for crooked banksters nor will there be looting on a scale of the TARP. EU leaders will decide which policies best reflect their own interests and those of their people. Judging from the results so far, that means the crisis is likely to persist for some time as the banking system comes under greater pressure and deflationary programs push bankrupt countries into a long-term slump.
There can be no doubt that Europe is leading the global economy back into recession. After all, contractionary policies tend to be, well, contractionary.