The Euro experiment cannot continue in its current form, period. Fiscal harmony only works when the net export and fiscal equations are also harmonized. Since it is too late for that to be established, we are now back to old-school economics. Countries need to have individualized foreign exchange capabilities. Greece, Italy, and Spain need to devalue their domestic currencies dramatically to pay for their debts. Oops, there is no such thing as a domestic currency. We can dance around the different topics, but absent debt write-off, and simultaneous governmental intervention to prevent an all-out European banking crisis, the Euro experiment is entering its final stages.
Liquidity? Nope. Solvency is the Problem.
The headline is that European bank liquidity has dissolved. The actual problem is that the cause of this is that solvency of European banks is the question. The Merkozy debate is really about how to solve the solvency issue because without a solution, a liquidity solution is nowhere to be found. We will be able to figure out who the survivors will be at a later date; for those currently long European bank equities, the answer is that no one will be left unscathed.
Germany is Pathetic For Many Reasons
Without the PIIGS, you could say that the Euro or Mark vs the USD should be much, much higher. If that were the case, then the German economy would be in a world of hurt. If anything, Germany has benefited from the weak Euro the most; Siemens, BMW, et al have all made money that would have gone to their global competition if the Euro didn't have these problems. For Germany to now turn around and behave in a holier-than-thou way is pathetic at best. Chancellor Merkel is playing a dangerous game, because responding to internal German politics will result in a much weaker German economy in the medium term, and potentially in the very short term if the European economy implodes. However, Chancellor Merkel holds all the cards at the moment, and whether she is bluffing or just stupid is irrelevant. She holds all the cards and needs to get all the concessions she can, while she can. However, Germany, and thus Europe, cannot solve this problem by itself.
Dear IMF: Require Sales of Gold to Help Solve
The IMF is required to solve this multi-faceted Prisoner's Dilemma exercise. The IMF purchases out the individual country, after securing all the gold reserves of that country. Period. Absent that, let the ECB flail around. Although it was widely criticized, the IMF put itself in this position when dealing with the Asian currency crisis. Some believe that the IMF created more problems than it solved. That is Monday-morning quarterbacking at is worst. Individual countries dramatically devalued their currency, took the austerity measures under IMF auspices, the population worked its collective ass off, the debts were repaid early, and growth resumed. That is the ONLY blueprint that now remains. Delaying acceptance of this is making it worse. Much, much worse.
Update (Nov 27): Sacre bleu! Ms Lagarde and IMF Right on Cue
The is no shortcut around a problem the size of Italy. This blog has suggested that the PIIGS be required to put up their family silverware (gold to be precise) to partially collateralize further rescue efforts. It has taken a month and a half (of time that we did not have) for these developments suggested here. The naysayers will look at the IMF plan/rumor and start throwing bombs at it; to which I say that TARP and POMO did what they were supposed to do, which is to avoid imminent depression, and allow the banking system heal. From that point, the economy could find a path back from the brink.
The objectives of TARP and POMO were achieved; the U.S. avoided instantaneous depression. That the banking system didn't use the steep yield curve along with much harsher government measures attached to TARP, is on someone else. Not the programs themselves. When you apply that analogy here, the IMF shouldn't be ignored.
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