Tuesday, June 15, 2010

More Eurogloom

Via Yves Smith:

As Ambrose Evans-Pritchard reports in the Telegraph (hat tip reader Swedish Lex), the French financial group AXA believes the €750 billion rescue package is a mere band-aid:

Ms Zemek [head of global fixed income at AXA] said the rescue had bought a “maximum” of 18 months respite before deeper structural damage hits home, with a “probable” default by Greece setting off a chain reaction across Southern Europe. “It would be the end of the euro as we know it. The long-term implications are at best a split in the eurozone, at worst the destruction of the euro. It is not going to end happily however you slice it,” she said…

Axa said there was “no chance” that the EU’s €750bn “shock and awe” shield will succeed since it treats Club Med’s debt trap as a short-term liquidity crisis…

A number of ex-IMF officials have said the policy is doomed to failure since there is no devaluation or debt relief to offset the ferocious fiscal squeeze, and may endanger the credibility of the Fund itself. The IMF had floated the idea of a debt restructuring but this was blocked by the Brussels.
Smith also links to this story:

"Worse, a UPI story by Martin Walker (hat tip Marshall Auerback) demonstrates not only how firm Trichet’s commitment to this misguided program is, but also how it is creating a rift with the US:
Well-placed European sources say last weekend’s meeting of Group of 20 finance ministers saw a strident row between U.S. Treasury Secretary Timothy Geithner and Jean-Claude Trichet, head of the European Central Bank.
It began when Geithner made his appeal for the Europeans to go easy on their austerity program….emergent economies were doing well and the United States was recovering; but both could be derailed if the Europeans slammed on the collective brakes. (One source says that Geithner went on to say that massive European spending cuts would be like adding the deflationary crash of 1931 to the stock market collapse of 1929.)
Trichet, his face red and his voice raised in anger, turned on Geithner. How dare the Americans speak this way, when the whole crisis was the fault of the Americans? It was the U.S. sub-prime mortgage crisis and the bonus-crazed culture of Wall Street that had got the world into this mess. But the Americans were taking no responsibility and very little of the burden….
Trichet made a point of stressing that European spending cuts would actually help the global economy by restoring market confidence, shaken by Greece’s sovereign debt problem and concerns about other members of the euro currency…
Perhaps Geithner was too polite to turn the tables on Trichet and point out that it was the eurozone and its policies that had let Greece drift steadily into such trouble…had also allowed France and Germany to flout the core rule that budget deficits shouldn’t go to more than 3 percent of gross domestic product. The eurozone, by trying to marry a single currency with more than a dozen separate national economic policies, had brought this problem upon itself. Many eminent economists, including the 1989 report for EU Commission President Jacques Delors, had warned specifically that this would be a critical problem.
Yves here. While the blame game makes for good theater, the central point is crucial: the eurozone is adopting disastrous policies to restore market confidence, and appears determined to adhere to them in the face of outright rejection."

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