Mr Osborne’s rhetoric on using the IMF to prop the Euro has firmed up more. He has always said the IMF should not lend money to prop up a currency, only a country in trouble. I interpret this to mean the IMF should not lend to any Euro member, as that would in my view be lending to prop a currency. Mr Osborne may define it less severely.
Now Mr Osborne is saying the UK should not make more money available to the IMF to lend to Euro members, unless and until France and Germany have made a larger contribution. He seems to have in mind those states putting more money into the European bail out fund. This is extremely unlikely. Germany thinks the problem countries should do more to rein in their own deficits. France is becoming financially strained herself and is not looking for more ways to spend money. That would seem to mean no more UK money for these purposes, which would be excellent news.
However, whilst there is still argument over IMF funds for Europe and Big Bazooka bail out funds within the Euro area, it looks as if for the time being the European Central Bank has issued enough new money to commercial banks to delay the crisis. Italian and Spanish bond yields have fallen. The European banks have gorged on 3 year money at 1% interest rates. We are told in a few weeks time they will be able to take some more from the bountiful Central Bank.
I am surprised the Germans have taken this so well. They have in the past fought against the ECB buying up government bonds itself. They wrote in the clause that prohibits the Bank lending directly to governments. So now the Central Bank has found a way round these restrictions, by lending large sums to commercial banks who in turn can hold or buy government bonds, lending to the governments.
Why have they in the past argued against it? Because Germany’s own experience is bitter when they had too much inflation. They are most concerned that this type of direct monetary action, effectively printing more money at one remove, will be inflationary. I guess they are hoping that in the short term the weak state of the banks will stop them lending this on to others and in so doing bloating the money supply. The ECB needs to be on vigilant inflation and money growth watch from here. It has pumped a lot into the system. It needs to see whether that finds its way into uses that allow banks to gear up and go on a lending spree. If it does, then watch out for inflation. If they are lucky, the broken state of the banks will stop too much inflation for now, whilst preventing collapse in the Italian markets.
Meanwhile, back in the real world, politicans in Euroland should be in panic about the high level of youth unemployment and of general unemployment. Now youth unemployment has gone above 50% in Spain and above 40% in Greece, they should ask themselves why they are so much in love with the currency scheme which has helped to bring about such a crisis.