The German magazine 'Der Spiegel' (the mirror) headlines today that European leaders in Brussels have been informed about the intention of the International Monetary Fund (IMF) to stop the financial aid to suffering euro country Greece, because Greece is not following the agreed path to reform their economy and bring down government spending.
This could lead to a default of Greece in September, when the next tranche of the money that has been reserved for Greece by the troika of the EU, the European Central Bank and IMF will not be paid out to them. Most European countries are not willing to pay anymore money to Greece if the IMF would no longer participate. Greece can not wait until September anyway, as its reforms are slacking and they need more money sooner. Greece is asking Brussels for more time, which would cost Europe another 10 to 50 billion euro...
It seems like they will not get the extra time, nor the extra money. Europe has stalled long enough for the European Stability Mechanism (ESM) to come into place. This fund is expected to be operational in September. Many politicians seem to no longer disapprove a Greek exit out of the eurozone. The exit is thought to be 'controllable', as the ESM can prevent the risk of further contamination to other European countries. How shortsighted can one be?
The financial markets will smell blood and will go after Spain and later Italy. Spanish interest rates have already topped the levels that caused Europe to set aside 100 billion euro for Spain. 100 billion saved Greece about a year, it saved Spain about 2 weeks. Spain will be next and the ESM is by far not big enough to rescue the 5th economy in Europe.
The euro will go down, that is my strong belief. Not the IMF would be to blame, but the EU itself.
The IMF is doing the only right thing, stopping this endless money burning.
Euro believers will ask the European Central Bank to start printing euro's to keep the currency alive, but their beliefs will soon be vaporized as elections will reach first The Netherlands and later Germany and Ireland (referendum). The people of Europe are already suffering from all the financial cuts that governments are forced to make to keep the euro alive. As a result, people see their income cut, their pensions cut and the value of their property dropping. They want change. They want the hundreds of billions of euro worth of support for Brussels to go to their own country's economy rather than in the bottomless pockets of corrupted and deceiving Greek officials or Spanish bankers.
As an economist, I truly believe in the laws of balance. If something goes wrong in one area, other areas will need to balance it by adjusting. What the European politicians, in their childish and naive quest for glory for Europe (read: glory for them) have been doing since 2008 is mistaking the euro for the balancing mechanism rather than letting the real balancing mechanism (devaluating southern European economies opposed to the northern European countries to bridge the trade deficit) do its work like it has done in Europe for so long. In their minds, Europe is already united, where in real life, Europe is not. Different tax schemes, different pension schemes, different banking regulations and - most importantly - different cultures and mentality. Financial markets are no dreamers, they don't believe in the fairy tales our politicians tell us. They laugh when they hear the Dutch Treasury Minister say that Greece will pay back all their debts, with interest!
These are hard times, and they will be even harder once the Euro project crashes, but it takes a disaster to enable rebuilding, it takes a fall to get back on your feet again. It takes harsh measures and bold decisions to regain balance in the European economies. But if we agree to accept the way markets will force us (towards a new balance) and bite the bullet, the politician's dream of one federal Europe may be lost, but the vision of a unified, flexible and economically powerful Europe may emerge.
Tomorrow the financial markets will show Europe what is required for regaining balance. Spain will have to leave the Euro soon and that will end the Euro. So instead of organizing meetings in Brussels to debate rescue plan A, B or C, politicians should prepare the Euro exit and come up with other ways to co-operate and co-exist. God forbid Herman Rompuy, the third Grimm brother, will draft these new plans. Best to let the IMF send a writer for that plan, or ask yours truly...
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