Everyone knows Europe is in trouble but most global economic policymakers are in denial over the true plight of the debt-ridden continent, says Christopher T. Mahoney, a former Vice Chairman of Moody’s.
Greece is seen coming dangerously close to defaulting on its debts and abandoning the euro, which could pressure other countries like Spain and Portugal to follow suit.
Tools to prevent such a crisis from unfolding include an issue of one bond backed by all eurozone countries, referred to widely was Euro Bonds, or having the European Central Bank step in and buy debts issued by troubled countries to ease the crisis.
Nice ideas, but they're not likely to happen, Mahoney writes in a Project Syndicate column.
European paymaster Germany has balked at a Euro Bond issue, which it sees as unfairly asking it to shoulder more debt from the troubled periphery.
Interest rates in Germany would rise as well.
Plus European Central Bank President Mario Draghi has said direct intervention remains on hold for now and that it's up to politicians to make the fiscal choices to improve the continent's economy.
"The entire planet seems to be in denial about what is about to occur in the eurozone. Pundits keep expecting Germany to pull a rabbit out of the hat and flood the continent with Euro Bonds, or that Mario Draghi will mount a coup at the European Central Bank and buy up every deadbeat country’s bonds," Mahoney writes.
"Either could happen, but both are extremely unlikely. Germany cannot guarantee the eurozone’s debt without control over the eurozone, which no one has offered, and Northern Europe will not permit the ECB to be hijacked by 'Club Med' and turned into a charity organization. It is not just a matter of politics; it is also – as the Germans keep pointing out – a matter of law."
Europe does have a plan of attack in place, but nobody seems to be following it.
"Europe has a Plan A, whereby each country would reform its economy, recapitalize its banks, and balance its budget. But Plan A is not working: its intended participants, most notably France, are rejecting it, and there is an emerging southern European consensus that austerity is not the solution."
Economic austerity measures such as public-sector layoffs and spending cuts have arguably exacerbated the problem in that instead of streamlining governments and paring down debts, they've in reality, cut so much into growth rates that tax revenues have fallen, thus making painful recessions in countries like Greece feel even worse.
"There is no well-thought-out plan for the orderly exit of the eurozone’s insolvent countries. There are no safeguards, no plans, no roadmap – nothing. The Maastricht Treaty, like the United States Constitution, did not provide for an exit mechanism. So, instead of realism and emergency planning, we get denial and more happy talk. But, just because something is 'unthinkable' doesn’t mean that it can’t happen."
Eurozone countries recently granted Spain access to $125 billion in rescue funding to help the country shore up its banks.
The International Monetary Fund, a multilateral lender of last resort, did not participate in the Spanish rescue assistance, but says it's ready to assist if needed.
"The IMF stands ready," said IMF Managing Director Christine Lagarde, "at the invitation of the Eurogroup members, to support the implementation and monitoring of this financial assistance through regular reporting," according to the AFP newswire
U.S. Treasury Secretary Timothy Geithner welcomes steps taken to bailout as Spain as well.
"These are important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area," the AFP adds
The United States is the IMF's largest shareholder.
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