The IMF has asked the EU to get its act together in tackling the debt issue. It was the right instruction to issue, but doing so in public just served to remind investors of the mess, helping send markets down more. Last night Wall Street rallied a bit on hopes that US politicians might be closer to a compromise on the US debt ceiling, so the US does not go into default on its debt.
I do not expect the US to default. The politicians have always raised the debt ceiling in the past, and will doubtless do so again. There is some tough argument between Republicans, determined to control the future deficit by more spending reductions, and Democrats who favour tax rises. I have more sympathy with the Republicans on this issue. Tax rises from here will slow the economy and make bringing the deficit down more difficult by slowing the increase in tax revenue. More spending cuts would help, by taking some of the pressure off the private sector which is needed to power the growth, and reassuring the private sector that there is some limit to how much will be taken from them by the state.
Few commentators are optimistic about the Thursday meeting of Finance Ministers in the EU as they struggle to reassure and prop up their ailing currency system. There are only two long term solutions. The first is to evict a few countries from the Euro for failing to control their debts, deficits and banking systems. The second is to move rapidly to a transfer union as they call it. This means moving towards a country called Europe, with more generous payments from the rich to the poor areas, and with stronger central controls over the budgets of each public region. Then all can borrow on the common credit card, with European bonds funding the excess public spending. Such a Europe would be given a fairer wind for a bit in the markets, as the markets would hope for more German discipline and less wayward Greek and Portuguese spending.
Instead we will probably be served up another series of temporary fixes, reflecting the refusal of the main players to own up to the fundamental issues. The lack of agreement between the European Central Bank, Germany and France makes adopting an answer which works very difficult.
The compromise might include a bit more central control over budgets and deficits for the future, some more temporary help for Greece, a larger fund to pay for other countries in trouble, and perhaps a more forgiving policy on buying up damaged sovereign debt by the European Bank. That might kick the can down the road for a few more weeks, as the markets like to say. It does not resolve the underlying problem.
The Uk should use this period of chaotic reconstruction of the EU centralising project to move towards a looser relationship with the emerging federal union. The Uk should not merely say it is not joining in the currency, the new banking, debt and economic governance arrangements. It should also say it wants powers back as its price for agreeing to the new powers the Euro area needs to make its currency work. Why not get control over our borders, our labour laws and our fish for a start? We have a veto over the Treaty changes they want, so they would be wise to accommodate us. We should stress that by being out and staying out of the Euro we are being excellent Europeans. If sterling had been subsumed in it with our banks attached, the Euro would be dead by now.