At the December’s European Council the eurozone and other Member States agreed to “consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis." The Eurozone leaders stressed they are “looking forward to parallel contributions from the international community.” On 19 December, the eurozone Member States agreed to provide EUR 150 billion of additional resources through bilateral loans to the IMF's General Resources Account. They are, therefore, expecting that non-eurozone member states will contribute with EUR 50 billion. The Czech Republic, Denmark, Poland, and Sweden have already indicated their willingness to contribute additional resources to the IMF. However, it was not enough to reach the EUR 200 billion target.
According to Christine Lagarde the fund would be used to support the IMF’s “global membership”, she said “These resources will enhance the IMF's capacity to fulfil its systemic responsibilities in support of its global membership, which is especially important given the ongoing economic slowdown and financial market tensions,”. However, these additional resources would be used by the IMF to deal with problems in the eurozone.
It is important to recall, on 27 October, the Chancellor of the Exchequer, George Osborne, in his statement to the House of Commons, said “we are prepared to see an increase only in the resources that the IMF makes available to all the countries of the world. We would not be prepared to see IMF resources reserved for use only by the eurozone.” Moreover, he said “I confirm today that Britain will not put its resources in either. We do not have a surplus; we have a large deficit.” He concluded “An active member of the IMF? Yes. Helping the IMF with advice and technical support? Yes. But the IMF contributing money to the eurozone bail-out fund? No. And Britain contributing money to the eurozone bail-out fund? No. That is Britain’s clear position.” Last December, the Government indicated that the UK’s contribution to such objective would be defined in the New Year within the framework of the G20. The UK refused, therefore, to commit to further IMF contributions to help eurozone countries. Nevertheless, according to The Express, George Osborne has recently said “If I felt it was a decent request by the IMF, then of course I would be willing to go to Parliament and make that request”. Moreover, he said “But let me be clear, I would not do that with Britain acting alone and we are very clear this is not a substitute for the eurozone providing money for dealing with its own currency.”
In the meantime, the IMF has recently confirmed that it needs to raise $500 billion in extra lending resources to help struggling economies from the effects of the eurozone debt crisis. According to Euractiv the IMF is “seeking to raise up to $600 billion to meet those potential financing needs. Of that, $500 billion would be for lending and $100 billion would be a "protection buffer."” It seems that the Eurozone member states’s pledge of $200 billion, above-mentioned, is part of this new target.
The US and Canada have already shown their unwillingness to contribute further resources to the IMF. According to a Treasury spokesperson, the US continues, "to believe that the IMF can play an important role in Europe, but only as a supplement to Europe's own efforts”. Moreover, he said, "The IMF cannot substitute for a robust euro area firewall." China, Japan, South Korea, Brazil and India believe Europe should contribute more and agreed on further measures.
The Government has already shown its intention to make further contributions to the IMF, but no figure has been given yet. The Commons must approve by affirmative resolution increases to the UK’s contribution to the IMF. It is important to recall that the UK’s contribution to the IMF has already been increased last July. The Financial Secretary to the Treasury, Mark Hoban, at the time said, “The subscription is denominated in the IMF’s unit of account, the special drawing right, and currently stands at 10.74 billion SDRs, which is approximately £10.7 billion at today’s exchange rate. The order will raise the subscription to 20.16 billion SDRs, equivalent to about £20.15 billion, representing an 88% increase in the UK’s commitment in quota lending to the IMF.” The MPs approved an extra £9.5 billion to the IMF, however it is important to mention that 30 Conservative backbenchers, including Bill Cash, voted against such increase.
George Osborne has already shown his willingness to ask, again, permission to the Parliament to increase the UK’s contribution to the IMF. However, this time the Government is likely to face stronger opposition and bigger rebellion. David Cameron and George Osborne have been constantly reminding us of the Coalition Government’s achievement of keeping Britain out of the eurozone bailouts, but now they are prepare to “indirectly” contribute to such bailouts through the IMF.
Last week, the credit rating agency Standard & Poor's (S&P) downgraded the credit ratings of nine eurozone member states. The credit ratings of Italy, Spain, Cyprus and Portugal were downgraded by two notches whilst Slovakia, Slovenia and Malta have seen their ratings cut by one notch. France and Austria lost their triple A status. In May 2010, the eurozone Member States created a temporary instrument, the European Financial Stability Facility (EFSF), worth €440 billion, to provide financial support to eurozone countries having difficulties refinancing their debts. The EFSF sells bonds and other debt instruments on the open market, which are secured against guarantees from eurozone states. Obviously, Standard & Poor's decision had an impact on the European Financial Stability Facility (EFSF), whose triple A status depends on the rating of six eurozone member states, including France and Austria. In fact, it did not take long for Standard and Poor's to downgrade the European Financial Stability Facility (EFSF) by one notch. The credit agency said in a statement “The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities. Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place”. Hence, on 16 January, the European Financial Stability Facility lost its triple-A rating. The President of the Eurogroup, said in a statement, that “EFSF continues to be assigned the best possible credit rating by Moody’s (Aaa) and Fitch (AAA), underlining its solidity.” Moreover, Jean-Claude Juncker pointed out “S&P's decision will not reduce EFSF’s lending capacity of €440 billion.” He stressed “EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programmes and will continue to be backed by unconditional and irrevocable guarantees by euro area Member States.” However, it is not enough to bail out Spain or Italy. Mario Draghi, President of the European Central Bank, said "The downgrade has a consequence – if it wants to keep its triple A status, it will have to lend less or, if not, the cost of lending will go up. If it wants to maintain the same capacity to lend, at the same price, you will have to have additional contributions from member states". Unsurprisingly, Germany has rejected such option. Wolfgang Schäuble, the German finance minister, excluding any further support from Germany, said “The guarantee sum that we have is sufficient by far for what the EFSF has to do in coming months.” Additional guarantees would place a further burden on AAA-rated countries, particularly on Germany.
It is important to recall that the eurozone leaders agreed on a European Stability Mechanism with a capital base of €700bn. Hence, when it enters into force, the ESM would have an effective lending capacity of €500 billion, through a combination of €80bn of paid-in capital and €620bn in the form of callable capital and of guarantees from eurozone states. Moreover, last December, the Eurozone leaders agreed that the European Stability Mechanism treaty should enter into force as soon as Member States representing 90 % of the capital commitments have ratified it. This treaty between eurozone Member States was signed in July 2011 but any member state has ratified it yet. They decided to anticipate the entry into force of the European Stability Mechanism to July 2012, instead of 2013. But, there was no decision on increasing its lending capacity.
It is now crystal clear that all measures to prevent the current debt crisis have failed, including the creation of the EFSF and the ESM, as the Greek debit crisis has spread to other countries. In fact, what the eurozone has been trying to prevent– the restructuring of Greek debt, is now unavoidable. The Eurozone should accept once and for all that the Euro does not work. However, they now want to move towards a fiscal and political union in order to save it. Last December, the Eurozone leaders aiming at overcoming the current crisis, agreed on the so-called "fiscal compact". Contrary to what has been said, the “fiscal compact” will do nothing to resolve the eurozone crisis. It has not been enough to calm the financial markets and the eurozone crisis will get worse. The credit rating agency Fitch said, following the EU summit, it had concluded that "a 'comprehensive solution' to the euro zone crisis is technically and politically beyond reach."
Hence, the answer is not “more Europe”, in fact as more Europe we have as worse become the situation. Germany is defending its interests at expense of smaller member states. Germany has no capacity to save the euro but, in the meantime, is imposing its conditions, namely controlling the budgets of other member states. This strategy cannot solve any problem, the eurozone, particularly Greece, Portugal, Italy, Spain, would have more debt, more, unemployment, more recession. These countries face a long period of stagnation, high unemployment, and painful structural reform. One could wonder whether getting out of the eurozone would be a better option for these countries. The costs of that member states exit of the eurozone would be temporary whereas the costs of keeping the euro would be unsurpassable, the present situation would be exacerbated, pilling debt, and submitted to the Franco-German demands.
Reacting to the eurozone downgrades, William Hague said to Sky News, "We want it to be stable and healthy. That's in our national interest. But it means that across Europe, including the UK, we need to redouble our efforts to get growth going." Then, he explained, “That meant more free trade agreements with the rest of the world, advances in the European single market and less regulations that damage business”. Bill Cash has been arguing that the UK “must re-gear” its “relationships as a matter of fundamental foreign policy and economic policy.” He has stressed “re-gearing our relationships to the Commonwealth countries, including India, as well as the US, which puts us in a position of potential economic prosperity from their growth in a free-trading sphere of ever-increasing prosperity.” In fact, as Bill Cash said “What we have to have is a fundamental change in the relationship between the United Kingdom and the European Union, because it is a failed project.”
