Imbalance Increases in Eurozone
February 18, 2009 · Posted in Global Economics
Bloomberg writes Steinbrueck Says Euro States May Bail Out Members:
German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out cash-strapped members of the 16-nation bloc, going further than his counterparts in saying euro states can’t be allowed to fail.
“Some countries are slowly getting into difficulties with their payments,” Steinbrueck said late yesterday in a speech in Dusseldorf. “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty.”
Steinbrueck’s comments underscore mounting investor concerns as European nations pile on debt to bail out banks and counter the deepest recession since World War II. The EU governing treaty says member states aren’t liable for other members’ obligations.
While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a “very difficult situation.” The comment came in response to a question from the audience. Ireland’s debt- rating outlook was cut by Moody’s Investors Service Jan. 30.
The European Commission predicts budget shortfalls this year of 11 percent of gross domestic product in Ireland, 3.7 percent in Greece, 6.2 percent in Spain and 3.8 percent in Italy, compared with 2.9 percent in Germany. The EU ceiling is 3 percent.
The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.
The euro fell below $1.26 for the first time since early December. The difference in yield, or spread, between 10-year Irish and German bonds widened nine basis points to 257 basis points today. It widened by almost six times since the middle of last year as investors demanded higher premiums to hold Irish debt.
The Irish government is committed to restoring sustainability to public finances by 2013, the Dublin-based finance ministry said today in an e-mailed statement. At 41 percent of gross domestic product, the country’s debt is below the EU average of 60 percent, it said.
EU rules don’t “really constrain the ability of euro area countries to support one another during a period of exceptional stress,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a research note. “It’s hard to imagine that the region as a whole wouldn’t come up with a package of measures to support the individual economy.”
Governments including Germany’s may call in help from international organizations first before committing funds and pushing their own budgets deeper into the red to help others.
There is nothing much that international groups can do. Please consider in particular IMF Running Out Of Cash:
Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world’s advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.
Who will bail out the IMF? I little while ago I wrote about the disastrous balance sheet of the Federal Reserve Bank, and concluded with a question. Who will bailout the Federal Reserve once it needs help? The IMF? It seems like the IMF will need help first.
European member states needs to come to their senses. An absolute and unconditional abandonment of any more bailout talks is highly necessary. Member states need to consolidate their finances, cut spending, trim down their obtrusive bureaucracies and cut their unsustainable tax burdens. Germany, France, and Italy should be leading the way in these efforts. The European Commission needs to put an end to its disastrous policy of subsidizing agriculture.
Individual responsibility per member state rather than complete collectivism should be aspired. Unfortunately Europe has not been very keen on individual responsibility. In Germany, France, and Italy, all one can hear is rants about “neoliberalism”, “anarchism”, “capitalism on steroids” which supposedly are to blame for the financial crisis.
The sentiment in the US is not at all different. As the US economy continues its decline, Europe is unwittingly joining the bandwaggon.