It’s time for the United States to tell IMF head Christine Lagarde, to just put a lid on it. Lagarde is among the phalanx of European and financial leaders who have failed so spectacularly to stem the European economic crisis. Now she is now leading the call for Germany to pony up more hundreds of billions of euros to bail out Greece and then other countries, should the dominos begin to fall.
Lagarde’s argument is absurd. Even Angela Merkel — the ever polite, ever firm, if occasionally misguided leader of Germany — knows it and has said so, repeatedly.
The Obama administration should say so, too. The administration has done well so far in avoiding committing additional U.S. taxpayer dollars to prop up Europe’s failed experiment. Europe must solve Europe’s problems. But the United States is also the leading member of the IMF by voting rights. The Obama administration cannot simply take a hands’ off attitude toward what Lagarde says and does. And what she is saying now would, if implemented, fail just as surely as her past efforts. Worse, it would bring down the one remaining, comparatively strong pillar of the European economy.
One can understand the desperation of Lagarde and other Euro elites. Their vision for Europe’s ascendancy and world leadership is collapsing in a loud and embarrassing fashion. Efforts to deal with financial and fiscal crises in the peripheral countries have come to naught but recession. That’s because the Europeans refused to address the underlying issues — a misaligned, poorly designed currency zone combined with debilitating economic policies. At its heart, Europe is dealing with an economic crisis, but it is only treating the financial and fiscal symptoms. This cannot turn out well.
And so the European technocrats resort to calls for ever-bigger “bazookas” or rescue funds. But rescue funds can only buy time, and that helps only if the time bought is put to good use. Instead, the time bought so far has been used to raise taxes and make Europe’s weaklings even weaker. Now, with France’s debt-rating downgrade, only Germany stands capable of contributing much to a rescue fund. But as Merkel points out, Germany’s debt is already at 82 percent of its economy. Just a few more percentage points and Germany’s debt rating will be in question, especially as Germany’s economy contracts under the drag of recession elsewhere.
Europe could have emerged from its trials relatively unscathed, if its leaders had faced facts squarely at the outset. The days of prosperity sufficient to fritter away on heavy regulations, high taxes, excessive spending, and sclerotic labor markets are over. Radical changes in all these areas and in the monetary union are unavoidable if Europe is to rise again. But even radical change, once implemented, takes years to bear real fruit. The seeds of growth take time to grow and mature. Europe no longer has that kind of time.
For her part, Merkel is not entirely blameless for what is about to transpire. Her focus on tight budget rules and austerity typically leading to tax hikes imposed on fiscal miscreants is, under the circumstances, odd given Germany’s heavy debt burden. It is also irrelevant to addressing the real sources of economic weakness and will likely lead to higher taxes, which will just depress economies even more. It’s impossible to bring down a debt-to-GDP ratio when GDP is falling.
European leaders are running out of time, and they know it. They now acknowledge the possibility, even likelihood, (most would say inevitability) of a Greek default, no matter what comes of the present negotiations with bondholders. Portugal cannot be far behind according to the market’s judgment (ten-year bonds are now paying over 18 percent). Painful actions taken two years ago might have altered the course. What Europe now faces in terms of the future of their European project, changes to their social welfare economic system, the demise of the present Euro, and painful recession can only be described as terrible necessities and lost opportunities.
It is understandable Europe’s leaders would do anything to delay these outcomes — understandable, but no less lamentable, as further delay can only make the necessities ultimately more painful. If the IMF’s Lagarde can’t help Europe to see this, then on behalf of the American people who remain deeply concerned about our friends across the pond, the Obama administration should politely but firmly tell Lagarde to put a sock in it.
— J. D. Foster is the the Heritage Foundation’s Norman B. Ture Senior Fellow in the Economics of Fiscal Policy.