Opinion We need the biggest bailout in history

The plans to save the eurozone are too little,too late

September 30, 2011 03:41 AM IST First published on: Sep 30, 2011 at 03:41 AM IST

Europe is exhausting its energies waging the last war when the next is already upon us. For example,the German Bundestag is in a fight to the finish over a solution to the economic crisis that has already been overtaken by events. The crisis has moved far beyond the flawed Greek programme; that the euro cannot survive in its present form; that many of our banks are close to insolvency; and that a far larger rescue fund is needed to stabilise the euro zone.

European leaders are yet to come to terms with the sheer enormity of the operation that has to be mounted. Two trillion euros are needed just to recapitalise banks and finance the borrowing needs of Greece,Spain,Portugal,Ireland and Italy until 2014. This is without parallel in world economic history,amounting to about 3 per cent of world GDP. That would dwarf previous Latin American and Asian bailouts and dramatically exceed the G-20s trillion-dollar underpinning of the International Monetary Fund in 2009.

The European leaders should also know by now that many of the rescue plans currently in vogue simply will not work. The 440 billion-euro European Finance and Stability Facility (EFSF),on which the Germans are voting,is far too small. A new variant floated in Washington last weekend would take the EFSFs euro440 billion and add European Central Bank money to lever support up to between euro1 trillion and euro2 trillion. The ECB has income from its banking operations and can act quickly. But the bank is already providing substantial liquidity and will not be persuaded to go beyond its narrow anti-inflation remit unless it has the support of the International Monetary Fund and the world financial community.

Eighty per cent of current IMF lending already goes to Europe,and the Fund has only $385 billion in additional lending capacity,a fraction of what is needed. Moreover the IMF is not likely to levy its members once more just to finance Europe. There may be a way through,however. In the 1970s,when the IMF was stretched,it borrowed from the oil states. Today it could borrow from them and from China,which would undoubtedly prefer lending to the IMF than,say,directly to Italy.

Of course,emergency intervention by the ECB and IMF is not an alternative to structural reform across Europe,but a bulwark to it. Indeed the only conditionality that has actually worked in Europe is IMF conditionality,and the fund should give European leaders a 12-month deadline to agree and implement a long-term alternative to short-term ECB/IMF financing in the form of fiscal coordination,euro bonds and fiscal transfers.

Could European leaders ever agree on such a radical course? Can Europe lead the markets,surprising them by agreeing to a comprehensive programme that combines fiscal,banking and supply-side reform?

With its high levels of conditionality,the IMF is not a soft option,but it has the advantage of reassuring Germany that it is not alone in bearing the costs of rescue; of reassuring France that its AAA credit rating has at least a chance of surviving; and reassuring the rest of the world a full-blooded new recession can be averted.

But time is already running out on this option. If,in the next month,the downturn threatens to go global,the rest of the world will back away from helping Europe,and a 1930s-style protectionism may become the order of the day.

Gordon Brown was UK prime minister

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