The IMF cut its forecast for EU area economic growth for 2012 saying that their collective economies will decline by 0.5%.
The IMF said the most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining fiscal adjustment, containing deleveraging, and providing more liquidity and monetary accommodation.
If it were only that easy. They also say:
Fiscal deficits in many advanced economies fell significantly during 2011, and most plan substantial adjustment this year. Continued adjustment is necessary for medium-term debt sustainability, and should ideally occur at a pace that supports adequate growth in output and employment, according to the latest Fiscal Monitor.
What these statements say, if you read between the lines, is that these governments should keep the financial markets flooded with liquidity, continue government spending but avoid deficits, and don’t let the banks fail.
These two quotes from the IMF actually point to the problem itself: the belief that technocrats can “run” an economy. These statements are almost nonsensical when you think about it: if they could do these things they say that need to be done, why haven’t they already done them, and if they have done them, why haven’t they worked?
If you recall, these policies were used elsewhere with the result that sovereign debt climbed, economic growth stagnated, and prices continued to decline. Japan did and is still doing all these things.
If you are looking for central banks, the mandarins who regulate these economies, and external bailout organizations like the IMF to solve the real problems plaguing Europe, then your faith in them would be misplaced. The very policies that they had previously supported got them into this mess. The problem is debt, mainly the debt of the sovereigns themselves, and their inability to pay it back. If they default, there are pretty good odds that the banks who lent the money will go broke. It is this that the EU leaders are trying to prevent.
They should recall the lesson given by King Cnut. This tide of debt won’t recede without considerable economic pain.