Fears of currency collapse pervasive in Washington
By Brian Beary in Washington | Friday 22 June 2012
The debt crisis in the eurozone continues to dominate discussions in Washington, as fears persist of an imminent Greek exit from the euro triggering a collapse of the entire single currency. The victory for pro-EU parties in the Greek elections, on 17 June, seems to have done little to assuage these fears. At least four events were organised at various think tanks to digest the latest twists and turns in the crisis. At one of these, hosted by the conservative American Enterprise Institute (AEI) on 19 June, forecasts were especially bleak.
Alessandro Leipold, chief economist at the Brussels-based Lisbon Council think tank, said the crisis had cast doubt over the assumption that “the process of EU integration is irreversible”. The ‘too little too late’ actions of EU political leaders were “actually increasing private sector fears,” suggested Leipold, a former International Monetary Fund (IMF) official. “We are still in the final act of this Greek tragedy,” which will inevitably lead to Greece’s exit from the euro, he predicted. As for the €500 billion EU bailout fund - the European Stability Mechanism - he explained how in practice, accessing these funds would be procedurally slow and unreliable. AEI Resident Scholar John Makin predicted that the euro as constituted would collapse and that a subset of EU countries would emerge to form a new currency. Desmond Lachman, AEI resident fellow, similarly suggested that it was time to turn to a new chapter, saying “end with horror is better than horror without end”.
MIXED MESSAGE FROM US TREASURY
At a separate event at the Centre for Strategic and International Studies (CSIS), on 20 June, a senior US Treasury official was more upbeat. Under Secretary Lael Brainard, just returning from the G20 summit in Los Cabos, Mexico, where the euro crisis also dominated the talks, said “we were very heartened by the formation of the new [Greek] government”. The US government supported the EU’s efforts to resolve the crisis, she said, notably the upcoming talks between the EU and the new Greek government “to work out a path forward”. Brainard underscored the need both “to reform” and “to show some flexibility” in these talks. That said, she also ruled out the US making a financial contribution to the new IMF fund being set up to potentially bail out indebted EU countries. “We never have made standalone bilateral loans to the IMF [...] we don’t have the capacity to do that,” she said. That new IMF fund has now increased to total US$456 billion, with all major developed and emerging economies contributing apart from the US and Canada. At the AEI event, ex-IMF official Leipold was critical of the US and Canada’s failure to contribute. Leipold also suggested that the EU should have gone to the IMF to manage the crisis from the start instead of adopting its ‘troika’ model (EU-IMF-ECB), which he likened to “seventeen cooks too many.”