“Believe” is the title of Justin Bieber’s most recent album. “Believe” is the theme of the European Union’s economic policies. There is evidence that more faith is placed in the 18-year-old singer than in the European Stabilization Mechanism - and certainly a lot more enthusiasm.
While many investors have rejoiced in the establishment of the European Stability Mechanism, all is not well with the new program. Financial Times reporters Robbin Wigglesworth and Ralph Atkins noted that “the ESM could partly crowd out other European borrowers if investors view it as a better bet than the debt of some weaker continental borrowers. For example, the EFSF’s 10-year bonds offer higher potential returns than comparable bonds of Austria and France, and only slightly lower than worse-rated Belgium.”
Wall Street Journal editorial board member Matthew Kaminski wrote: “Public unease in Germany over the price tag for the rescues grew this month after the ECB unveiled a plan to purchase the debts of troubled governments and the German constitutional court blessed the bailouts. Ms. Merkel's approval rating promptly rose to 61%, which suggests formidable political savvy, some say a Machiavellian genius.”
Economists around her grumble that endless bailouts are planting the seeds of future trouble, and the political advisers worry about a popular backlash in Germany one day. Yet no consensus exists in the EU for any other approach - either for fatter German checks for the bankrupt "Club Med" countries or for a cold cutoff of aid, starting with the dilatory Greeks. And no alternative exists to Ms. Merkel's leadership. Britain stays out of the euro mess by choice; the French are preoccupied by their economic troubles. Ms. Merkel's ability to navigate the crisis and handle her domestic public pressures makes her indispensable.
Ambrose Evans-Pritchard wrote in the London Telegraph that all is not well with the International Monetary Fund: “The IMF is evolving from a liquidity mechanism into a bank. This is neither in keeping with the legal and institutional role of the IMF or with its ability to handle risks,” said the Bundesbank in its monthly report. The bank said the Fund was right to help rescue Greece, Ireland and Portugal but said monitoring levels were slipping and there had been a “watering down” of standards. The scale of loans risks “overwhelming the IMF’s institutional structure.”
The unprecedented attack came as the IMF’s chief, Christine Lagarde, called for urgent measures across the world to head off a fresh global slump. While praising the latest emergency measures of central banks in the US, Europe and Japan, she said this was not enough to secure recovery.
The Europeans must activate their new machinery, while the US must prevent a “dramatic tightening” of fiscal policy later this year. Failure to act “would effectively plunge the country off a 'fiscal cliff'", cutting US growth by up to 2%. She said this would pose a “serious threat for the global economy”.
The problem for the European Stabilization Mechanism (and indeed for the impact of QE3) is that belief must be renewed every day. And belief based on fiat money is evanescent. A monetary system needs to be based on something more substantial, something real…a gold standard. Then perhaps, central bankers can sing with Justin Bieber:
It didn't matter how many times I got knocked on the floor
You knew one day I would be standing tall
Just look at us now