The EU-bailout aftermath

French President Nicolas Sarkozy, right, shares a word with Greek Prime Minister George Papandreou, center, and German Chancellor Angela Merkel during an EU summit in Brussels. Photo: AP Photo/Virginia Mayo

It’s been more than a week since Europe’s attempt to “shock and awe” financial markets with the announcement of a nearly $1 trillion rescue package to shore up fears about the eurozone. While fear of defaults by Greece (and potentially other PIIGS members) has been staved off, the continuing slide of the euro has not, and the question remains, will the plan work?

We took a quick survey around the Web to check out a couple different prominent reactions to the ambitious plan.

Camp A: The plan will definitely work

Needless to say, participants of the bailout plan are bullish. Dominique Strauss-Kahn, the IMF managing director, had this to say post announcement:

I strongly welcome the far-reaching steps unveiled … by the European Union and the European Central Bank (ECB) to restore confidence and financial stability in the euro area. These are strong measures that will help to secure global economic and financial stability, and preserve the global economic recovery. Implementation of actions to put public finances on a sustainable footing is key to restoring economic health in Europe.

Camp B: The plan will probably work

Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics, a nonpartisan think tank dedicated to international economic policy, wrote immediately after the announcement:

Europe’s leaders seem finally to have risen to the occasion in their crisis management, as they put together something genuinely BIG over the weekend to support the financial stability of the eurozone.

However, in a more recent post, after more details about the bailout were announced, specifically some of the assumptions that the IMF makes in its analysis of the Greek restructuring program, Kirkegaard is considerably more pessimistic:

It did not take long for the $1 trillion rescue package in Europe to stir second thoughts in global financial markets. This is probably not too surprising, since the purpose of the package was to contain the contagion risks in Europe without addressing the immediate cause of the problem, Greece’s insolvency.

Camp C: The plan will most likely not work

Kenneth Rogoff, Professor of Economics and Thomas D. Cabot Professor of Public Policy at Harvard University, is a former economist with the IMF and has come firmly out on the pessimistic side of the equation. Although he notes that the devaluing of the euro might be good for Germany in the short term, the bailout package is “a fig leaf for the ECB [European Central Bank] to go across Europe and bailout countries.” Rogoff instead supports the idea of letting countries like Greece and Portugal “temporarily exit the euro and later re-enter.” He also notes that the bailout package may not prevent defaults:

The main issue is whether those countries [southern countries that are in trouble] will be able to sustain fiscal tightening over the period required to improve their debt ratios. They’re all either in recession or teetering on recession. So their debt is going to grow.

Camp D: The plan will fail

For some, there is no doubt that the EU bailout package will be an abject failure. Mark Weisbrot, co-director of the progressive Center for Economic and Policy Research in Washington, D.C., wrote in the International Herald Tribune that the plan “does not resolve the underlying problem” and “will make the current economic problems even worse.”

The problem is one of irrational economic policy… The projections show that if their program “works,” Greece’s debt will rise from 115 percent of gross domestic product today to 149 percent in 2013. This means that in less than three years, and most likely sooner, Greece will be facing the same crisis that it faces today.

You cannot shrink your way out of a recession; you have to grow your way out… and if the EU and the IMF will not offer a growth option to Greece, the country would be better off leaving the Euro and renegotiating its debt.

* * *

EU bailout as US political football

But while economists have been focused on the effect the bailout package will have on the economies of the euro zone, pundits in the U.S. have been a lot more focused on where the money is coming from. And specifically the question of whether U.S. taxpayers may be contributing to the bailout of countries in Europe.

The entire IMF membership is on the hook for the commitment of up to €250 billion according to their national quota share in the fund. This means that the United States, the largest stakeholder, will foot a substantial portion of the bill: $55 billion contribution according to the Peterson Institute.

Needless to say, this has not sat well with politicians in the U.S. – some of whom didn’t even support the TARP bailout. On Monday, the Senate unanimously passed an amendment to the Financial Regulation overhaul requiring the Obama Administration to certify that any future loans made by the IMF would be repaid in full. In the House Representative Mike Pense introduced legislation to “stop U.S. tax dollars from being used by the International Monetary Fund for bailout of European countries.”

Treasury Secretary Geithner called the measures unreasonable and pointed out that “the US has never lost a penny” in the 60 years of helping the IMF manage global financial challenges.

 
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