Monday, September 3, 2012

EFSF head says Eurozone crisis over in two years

The Telegraph reports that the head of the European Financial Stability Fund (EFSF), Klaus Regling, said the eurozone crisis could be over in "one to two years" if member states stick to their pledges.

Now there is a big 'if'.

How exactly can member states stick to their pledges given the negative economic feedback loop embedded in the pledges?

For example, Spain is already in a recession/depression.  Cutting government spending per the pledge demand by the EU as part of a bailout would reduce economic activity further.  With a more depressed economy, naturally Spain will generate less tax revenue.  With less tax revenue, how will Spain meet its pledge to balance its budget?
"If all countries in the currency zone strictly fulfil their budgetary consolidation targets and continue to improve their competitiveness then the crisis can be over in one or two years," he told German news weekly Der Spiegel in an interview to be published on Monday. 
Regling, who is German, described his European Financial Stability Facility (EFSF) rescue fund as successful in heading off the worst potential consequences of the crisis, now in its third year. 
"If it weren't for us, Portugal and Ireland would probably no longer be in the eurozone."
Actually, Portugal and Ireland could still be in the eurozone if the EFSF didn't exist.

Rather than receive a bailout that is crushing their economies, they would have followed Iceland and adopted the Swedish model.  Under this model, the banks would have absorbed the losses on the excess debt in the financial system.

Like Iceland, by making the banks absorb the losses their real economy would have been protected.  Like Iceland, they would now have an investment grade rating on their debt and their economies would be growing.

Compare this to the tremendous burden placed on the real economies of Ireland and Portugal by the mountain of excess debt including the bailout.

Which countries position is better - Iceland's, Ireland's or Portugal's?
The EFSF, which was established with a total lending capacity of €440bn (£348bn), is due to be replaced by a permanent bailout fund called the European Stability Mechanism, with €500bn of firepower.

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