The Euro Zone

It would seem that the news of the euro’s demise has been greatly exaggerated; or at least deferred. The monetary union at the centre of the world’s largest trading bloc had been on life support in the wake of the massive pressures created by efforts to keep Greece and other weaker economies solvent. The latest missed deadline was on December 19 when the 150 billion Euros that were supposed to be collected from members to pass on to the IMF (to stabilise the eurozone) remained up in the air.

In the meantime, IMF Director Christine Lagarde warned of a global recession that, she claims, could rival the 1930 Great Depression. This admonition came on top of the news that the European economy as a whole was going to certainly contract in 2012. This concatenation of dismal news of a shrinking world economy will certainly place greater pressure on hopes of keeping the eurozone intact.

Lagarde’s exhortation for “all countries” to take coordinated and collective action to avert a catastrophic meltdown next year is certainly going to be unheeded, as the rule seems to be “every country for itself and the devil takes the hindmost”. Lagarde did note that this “coordinated” action will have to begin in the 17 eurozone member countries where the crisis is most severe presently. The EU loan to the IMF designated for the eurozone was part of a complex dance to avoid the conclusion that the profligate countries such as Greece could be rescued without any austerity measures being imposed. All of this was part of the larger package of standards for fiscal spending and borrowing that, in effect, will create a “new EU”.

While Britain is not part of the eurozone, its blunt refusal to contribute its allotted share was one additional blow on the overall survivability of the EU project. Britain’s historic suspicion of Germany, which has bucked the tide and remained very strong, is symptomatic of some of the pressures the bloc is facing. For the record even the German Federal Bank (GFB) seems hesitant to make good on its finance minister’s commitment on the loan. The GFB is waiting for non-European IMF members to signal they will also contribute to the bailout. But even the U. S. is balking.

While the Christmas holidays have given the euro a breather, the European Central Bank (ECB) has given a blunt assessment that over 200 million Euros will be needed by the first week of January. Although the ECB claims the euro will survive, it reiterated that it will not purchase more state bonds from highly indebted eurozone countries, since this would be tantamount to printing money for them. This, it asserted, is not a viable long-term strategy.

However, the proposal of the ECB will raise new concerns that the crisis is simply being used to generate more profits for banks while ordinary citizens are forced to undergo severe reduction of their standard of living through the imposition of austerity programmes. Putatively to pre-empt a credit crunch to businesses, the ECB intends to offer banks unlimited three-year loans at a nominal one per cent interest rate. However, these loans may encourage the banks to use the funds to buy high yield short-term bonds from the very states that precipitated the crisis and make a killing. Commercial firms might still flounder for credit while money flows elsewhere.

In the lull, it is expected that the new permanent European bailout fund, the European Stability Mechanism (ESM), will go into effect within six months. Concurrently, work continues on the first draft of the fiscal union contract, which all EU states barring Britain are expected to sign.

Optimists believe that if all goes to plan, the contract should be signed in March and kick in by midyear. Some experts suggest the agreement should be legally binding if nine of the 26 countries ratify it.