Wednesday, 17 July 2013

Abolish the troika

European Union Justice Commissioner Viviane Reding addresses the European Parliament's Committee on civil liberties, justice and home affairs in Brussels June 19, 2013. REUTERS/Francois LenoirAt last someone said it!   Abolish the troika!

The honour belongs to EU Justice Commissioner Viviane Reding - see link below:

Viviane Reding - time for troika is gone

I would go further.   There should have never been a troika.  It was wrong for the EU to call in the IMF to solve the problems of Euro countries that needed a bailout and it was wrong for the IMF to accept.   At most the IMF could have acted in a consultancy role but never as an actual lender and a key member of the team that sought to resolve the disequilibria within the Euro monetary system.

When the IMF intervenes it normally intervenes to bailout countries that are in command of their own currency.   Part of the standard IMF recipe involves devaluation of the currency in order to restore international competitiveness of the country in distress whilst it works out an economic restructuring programme.   The IMF has to dose austerity measures caused by the restructuring with the growth policies generated by the devaluation that makes the country internationally competitive again.

This could not be done with Greece, Ireland, Portugal or Cyprus as they are members of the monetary union and cannot devalue their currency.   At most the IMF could have intervened to bailout the Euro area as a whole.   But the Euro area as a whole needs no bailout!

As a whole the Euro area has no financial problems, it runs a small surplus in its balance of payments with the rest of the world and is one of the most affluent economic areas on the planet.   The problems are with particular countries within the Euro area and this explains why I maintain that true solution of the Euro area problems demands a Marshall Plan approach, where the adjustment burden is shared by both surplus and deficit countries.

The  IMF was not formed to take resources from poor countries ( even China is still relatively poor) to save rich countries in a monetary union who should show enough solidarity to save themselves.

Reding is right!  The Troika should be abolished.  Indeed it should have never existed.

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