Like US jobs problem, solving the Eurozone crisis means tough decisions

The solutions to the problems in the Eurozone are known, and they will require policymakers to do some unpopular things

Laszlo Balogh/Reuters/File
German Finance Minister Wolfgang Schaeuble attends a news conference with with Hungarian Prime Minister Viktor Orban (R) in Budapest December 5, 2011. Bernstein argues that solving the Eurozone crisis will require some tough, unpopular decisions from the region's policymakers.

One: The solutions to the problems in the Eurozone, not unlike the jobs problem here, are known: a large fund committed to backstopping the governments and banks holding troubled debt, and managed default by Greece.  Like many here, I’ve criticized the bumbling policy makers of Europe, especially the central bank (the ECB) for failing to lead.

Yet, after spending some time there recently, and talking to some of the policy makers involved, I’m a slight bit more sympathetic—though just a bit: true leadership means you sometimes have to do tough, unpopular things.

But one conversation stuck with me, wherein a German analyst, stressing how deeply unpopular the bailouts are with their electorate, told me in so many words: “we know what we must do; but we have to do it secretly.”  Prime Minister Jean-Claude Juncker of Luxembourg put it this way: “We all know what to do, but we don’t know how to get reelected once we have done it.”

Of course, that’s a main reason you have politically insulated central banks that must play the lender of last resort role in rare moments when that’s precisely…um…the last resort.  But somehow, the ECB has yet to get that memo.

Two: OK, if the ECB won’t step up, what about the International Monetary fund, or IMF?  Howard Schneider’s been writing useful pieces about this in the WaPo, and in this one, he covers what I think could (unfortunately) become a big deal here in the next week or so.

The IMF provides some cover and could play an effective role in channeling loans to the troubled Eurozone economies.  But there’s a nascent movement among US politicians to stop them based on the false belief that  by doing so they’d be protecting US taxpayers from exposure to the European bailouts.

Here’s why that’s almost 100% wrong.

–the claim that the President will go to Congress to ask for more money to lend to the IMF to help Europe is certainly wrong;

–the claim that the loans expose the US to default risk is, of course, not wholly wrong—that’s always been the case since we’ve been a member of the fund.  But it’s extremely unlikely.

The IMF enjoys preferred creditor status—they get paid back first—and it has a long, solid track record of being repaid.  Some of these same noises were made when Argentina received large infusions from the fund, but the country paid their debts back to the IMF before they were due (though Schneider does point out that some African countries are in “protracted arrears”).

In short, in a world of interconnected financial markets and great disparities in wealth, credit, and financial intermediaries, you need an IMF.  We’re a member as we should be, and that implies some credit risk, albeit tiny in this case.  In fact, the US has never lost money on our contributions to the fund, which is pretty remarkable given that the finances of some of places they’ve leant to make Greece look prudent.

European policy makers are having enough success convincing themselves not to solve their problems.  They don’t need any help from our politicians.

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