$1 Trillion EU /IMF Bailout – No Sure Cure For Euro
by Hiland Doolittle
By Tuesday morning, stern questions surrounding the EU – IMF euro zone rescue plan had already begun to surface. The $1 trillion bailout package for the 27-member euro zone, which prompted a global upturn in equity and money markets on Monday, fell under closer scrutiny and skepticism rose quickly as the overall consensus seemed to be “too little, too late” for the euro and perhaps the EU.
The EU-IMF’s nuclear rescue package was unveiled by European Central Bank President Jean-Claude Trichet on Sunday night. Under the agreement, the EU will contribute 500 billion euros and the IMF will add another 250 billion euros to complete the bailout package. An additional $100 billion for Greece has already been committed.
By Tuesday, pressing questions about how politics will play out as the package unfolds arose. Just about every nation in the region needs austerity cuts to meet the EU’s stringent standards. Under attack are the size of government, unrealistic benefits to public employees, and disparity among retirement ages. These cuts are political nightmares.
In Greece, socio-economic changes incite the public and influence politics. As evidenced by the bloodied streets of Athens and the electoral defeat of German Chancellor Angela Merkel, the bailout, the fate of the euro and the fate of the European Union mean less to the public than their existing lifestyles. Any euro zone nation seeking aid will have to undergo austerity cuts similar to those of Greece.
The media consensus is that the bailout package along with the previously committed $100 billion allocated for the bailout of Greece will stem the current tide but may not provide the spectacular, long-term solution the region needs to right the euro. At some point soon, government operating costs must decrease and sales must increase in order for the ECU to survive.
As the EU and the IMF struggled to put the pieces of the bailout together, global markets closed Friday with a wait and see attitude. The size of the EU – IMF commitment is impressive and the euro rose sharply on Monday only to fall back on Tuesday. By midday, the euro stood at $1.273 against the dollar.
The Benefits of The Bailout
The most immediate benefit of the package is the stabilization of world markets and the time that has been bought for member nations to toe the austerity line. Opponents of the move content that outside influences impacted the EU – IMF decision. The reality is that action was needed and sooner rather than later.
A secondary benefit is that Greece has a financial reprieve. However, the government is left with strict mandates to get spending under control and trim debt to 3% of GDP. Currently the rate exceeds 13.9% of GDP. On Monday, Greece’s cabinet approved major changes in the pension system and raised the retirement age from 60 to 65. These changes are imposed by the EU as a condition to financial assistance. On Tuesday, Greece approached the ECB to request immediate assistance.
The austerity plans for Greece are complex and multi-dimensional. Public retirement ages have been raised, benefits will be trimmed and services cut. Any other EU nation needing financial assistance will find stringent austerity cuts attached. The hope is that governments will begin to act now to remedy their large deficits. Troubled economies in Spain, Portugal, Italy and Ireland now have time to impose the cuts necessary to close the gap between sovereign debt and the GDP.
On Monday, Greece’s cabinet approved major changes in the pension system and raised the retirement age from 60 to 65. These changes are required by the EU as a condition to assistance. On Tuesday, Greece approached the ECB to request immediate assistance.
The European Central Bank announced that it would begin to buy euro zone government bonds to help stabilize markets. This action is a reversal of form as the ECB has only participated in full-scale asset purchases in the past.
Trichet explained his view of the package. “For us, what is absolutely decisive is the commitment of governments of the euro area to take al measures needed to meet their fiscal targets this year and in the years ahead.”
Always the master of understatement, Trichet is guiding the EU through its most challenging period. The true benefit of the bailout package is that it buys time for the member nations. Members are certain to see a more proactive governing body and there are many details yet to be resolved, but for the time being, the euro is still in business.
The Weaknesses of The Bailout
There are many skeptics who question the prudence of the bailout that basically has taxpayers from Germany paying for years of fiscal irresponsibility by other nations. The availability of the money may give politicians in the zone’s most troubled economies more breathing room to implement the very necessary and much needed spending cuts.
Trichet’s announcement was accompanied by a warning to member nations that it is now time to make those heavy cuts. No euro zone nation is compliant with the debt to GDP ratio that was at the core of the EU’s foundation.
“This is a big plaster and there’s a lot of work to do in terms of getting these budget deficits under control and it’s also a reminder that the financial sector isn’t in great health,” offered Marc Ostwalt of Monument Securities.
Critics suggest this is the age-old shill game but throws good money after bad. The $1 trillion package may only last until 2012 unless cuts are enacted quickly. Germany and Spain have committed to begin trimming immediately.
The package and the ECB’s decision to pump money into the system will temporarily end the liquidity crisis and dampen speculators. European laws do not permit the ECB to purchase debt directly from governments in the way the U.S. Banks did. The ECB is permitted to participate in secondary markets.
Tags: Bailout, ECB, Economy, Euro, European Central Bank, GDP, Germany, US Dollar
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
