Governments are playing double or quits in their game with financial markets. The package they announced last weekend is dramatic. But the question is whether it is more than a temporary solution. The answer is: no. As initially designed, the eurozone has failed. It will succeed only if radically reformed.
What is the plan? First, European governments have committed €500bn (€440bn in loan guarantees to eurozone members in difficulties, and a €60bn increase in a balance of payments facility). Second, the International Monetary Fund will, it appears, put up an additional €250bn ($320bn, £215bn). Third, the European Central Bank has, to the chagrin of Axel Weber, president of the Bundesbank, decided to purchase the bonds of members under attack. Finally, the US Federal Reserve has reopened swap lines, to provide foreign banks with access to dollar funding. This is a panic-driven response to market panic. It reminds us of the autumn of 2008.
Read Full Article »