Europe’s financial Maginot Line
Europe’s proposed financial firewall around Spain and Italy will likely prove as effective in protecting those countries from another market onslaught as was the Maginot Line in protecting France from Germany.

Article Highlights

  • Financial firewall would dribble money to #Spain and #Italy instead of hitting them with an economic "bazooka"

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  • Financing programs don't restore market confidence if they come with severe fiscal austerity within a euro straitjacket #debt

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  • Reviewing the large lending programs for Greece & Portugal should make policymakers reconsider the merits of a firewall

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In 1940, the Maginot Line proved woefully ineffective in protecting France from a German invasion, despite the great amount spent on its construction and the high hopes placed on its impregnability. One has to wonder whether Europe’s proposed financial firewall around Spain and Italy will prove any more effective in protecting those countries from another market onslaught than was the Maginot line in protecting France. The very design of the proposed firewall appears to be basically flawed in dealing with a renewed loss of market confidence in the euro’s long-run sustainability.

At the top of the policy agenda for the International Monetary Fund’s April 21-22 spring meeting is the construction of a financial firewall for Italy and Spain. Christine Lagarde, the IMF’s managing director, has been emphasizing that the IMF presently has only around $380 billion at its disposal in uncommitted resources for the IMF’s entire membership. Anticipating the real possibility of renewed market pressure on the European periphery, she is proposing that the IMF’s resources be augmented by at least $500 billion. To that end, she has been seeking commitments from non-European countries to complement the $150 billion in bilateral loan commitments that the IMF has already received from the European countries.

At the recent G-20 Finance Ministers’ meeting in Mexico, the non-European countries, including most notably China and Brazil, insisted that any bilateral loan commitments that they make to the IMF must be preceded by a greater effort by Europe to help itself in dealing with its debt crisis. They were especially keen to have the Europeans beef up their own bailout funds. In particular, they wanted the Europeans to allow the European Financial Stability Fund (EFSF) to run through mid-2013, as originally envisaged, rather than to have it expire in June 2012. By extending the EFSF’s life, the Europeans could increase the size of their bailout by €250 billion, bringing it to €750 billion.

Read the full article on American.com

Desmond Lachman is a resident fellow at AEI.

 

 

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