IMF loses all faith in the euro project
By Ambrose Evans-Pritchard
July 19th, 2012
The IMF’s latest report on the eurozone is an astonishing document. When the full history of this episode is written, this “Article IV Consultation” will be cited as a key exhibit.
The euro area crisis has reached a new and critical stage. Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself.”
The adverse links between sovereigns, banks, and the real economy are stronger than ever. Financial markets are increasingly fragmenting along national borders.
It said the eurozone is unworkable in its current form, a half-baked currency union that spreads contagion like wildfire without the backup machinery to contain the damage:
The euro area is in an uncomfortable and unsustainable halfway point. While it is sufficiently integrated to allow escalating problems in one country to spill over to others, it lacks the economic flexibility or policy tools to deal with these spillovers.
Crucially, the euro area also lacks essential financial and fiscal policy tools to stabilise the monetary union. As the crisis has illustrated, without a strong common financial stability framework, banking problems are hard to contain and resolve in an integrated market.
Most of southern Europe is at serious risk of a “debt-deflation spiral”, and the dangers are masked by the austerity taxes themselves. “This disinflationary environment in much of the periphery will make it difficult for many countries to reduce the burden of debt.”
Europe’s leaders have still failed to grasp the nettle: