Cogito Ergo Non Serviam

IMF Says Euro Needs Fiscal Union

The International Monetary Fund issued a statement on Greece, the euro and debt on Tuesday. This was the day before Greek MPs were to vote on the financial package offered by their nation's creditors. The timing was unfortunate because the IMF called into question not just the current offer but the entire structure of the eurozone. Greek public debt, says the IMF, is now "highly unsustainable," and it offers a few remedies. All of them amount to a fiscal union.

The IMF maintains that everything would have been just fine if the Greek government had implemented all the reforms that the creditors had demanded in years past. Since the reforms were incomplete, "debt-to-GDP by 2022 was projected to increase from an estimate less than a year ago of about 105 percent to a revised estimate of 142 percent, significantly above the target of 110 percent of GDP." If the Greeks had taken all the IMF medicine, the IMF argues that there would have been public debt of "124 percent of GDP by 2020 and 'substantially below' 110 percent of GDP by 2022."

Thanks to the closure of the banks and other chaos over the last two weeks, the model now says that "Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt -- at 177 percent of GDP in 2014 -- is already behind us." In addition, "By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA [Debt Sustainability Analysis]."

Under these conditions, the IMF offers three ways out of the mess. First, the creditors could extend the maturities on the debt by about 30 years. That isn't turning a 10-year note into a 40-year note. Instead, Greece would not pay a single euro for the next 30 years, and then, would make payments on the 10-year. Since the creditors aren't getting all of their money back on time, this is, in effect, a transfer to Greece of the difference between the two maturities

Another option suggested was a straightforward reduction in the amount of debt, what financiers call a "haircut." This would be the most direct and least dishonest way to deal with the debt. Greece would simply pay a percentage of what it owes with its creditors writing the rest off. This journal prefers an approach like this that offers 50% to creditors. The danger, of course, is that other heavily indebted economies may demand similar treatment. Moreover, there is no guarantee that this would be a one-time-only event.

The third option the IMF identified is "explicit annual transfers to the Greek budget." The EU or some other source or sources would simply give Greece the money it needs (or some of it anyway) to make debt payments. That is a de jure as well as a de facto fiscal union.

If the Greek debt isn't addressed within the structure of a fiscal union, it cannot be paid off according to the IMF. Kicking the Greeks out of the eurozone won't get the creditors their money back either; new drachmas aren't going to be worth as much as the euro, so what point is there to doing that?

The euro is built upon an economic fallacy, that productivity across its entirety would be largely uniform over time. No large region of the world is like that. Western China is different from the coastal cities of the east; South Africa and Zimbabwe are light-years apart; and Mississippi is subsidized by California. The issue for eurocrats is whether they want to see the fiscal union in whatever form move ahead. The alternative is constant crisis, Grexit and the risk of other nations leaving the eurozone when times get tough.

Germany, the Netherlands, Austria and the other strong economies in the eurozone may prefer that, but their prosperity would suffer greatly if the periphery to which they export were outside the euro. If some nations leave, the euro would be much stronger than the new local currencies, and exports to those nations from Germany and the others would die off. The subsidies of a fiscal union would keep the export markets open.

The question is simple: Do the creditors understand their own self-interest?

© Copyright 2015 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



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