G20 Weekend Statement Will Not Bring the Euro Debt Crisis to Closure

April 22, 2012

Finance ministers and central bank governors of the Group of Twenty meeting in Washington D.C. on Saturday released a statement that confirmed leaked reports of an accord to raise IMF resources “by over $430 billion in addition to the quota increase under the 2010 reform.”  These augmented resources are to be available to all IMF members, not just currently struggling nations within the euro area.  The United States is not contributing to the increase, but the BRIC nations will be the source of a large part of it.  As many economists predicted, a solution of fiscal austerity and other reforms has not quelled the euro debt crisis for the simple reason that the medicine will undercut economic growth, without which it is not possible to rein in debt:GDP ratios to sustainable levels.  The euro experiment will not survive indefinitely unless Germany eventually agrees to policy adjustments that rotate its growth away from exports and toward consumption.  Such concessions seem doubtful, so pressure is persisting on Euroland’s peripheral nations.  Germany’s continuing opposition to eurobonds is another roadblock against ending the euro debt crisis.

The other European political development over the weekend was Sunday’s first round of presidential elections.  Socialist Hollande narrowly beat the incumbent center-right Sarkozy.  Each won less than 28% of the ballots, while far-right, anti-immigration Marine Le Pen captured about a fifth of the votes to take third place.  The strength of her showing was the biggest surprise of the first round.  A runoff round on May 6 between Hollande and Sarkozy will decide the presidency for the next five years.  National Assembly elections will follow on June 10 and 17.  Opinion polls suggesting that Hollande will beat Sarkozy are likely to prove prophetic unless the latter can rally Le Pen’s minions to his side, but many voters will be fearful of electing a government that is so indebted to the extreme right.  Meanwhile, Holland wants to reopen many aspects of the euro debt accords negotiated by the present Sarkozy government, and the French economy has been struggling to maintain forward momentum.  Preliminary April purchasing manager survey results for France as well as Germany and the whole euro area will be published later on Monday.  The day could prove difficult for European sovereign bonds.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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