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IMF and Eurozone ‘vulnerable to renewed stress’

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imf 1On Monday 8 July, the European Council published the outcome of the monitoring exercise that is the European Semester along with the country-specific recommendations (CSRs)(http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/137875.pdf) . The document is accompanied by an explanatory note, detailing that countries must ‘comply or explain’ changes agreed to the European Commission’s CSRs. If you want a slightly tongue in cheek guide to the European Semester, check out my glossary.

On the same day, the International Monetary Fund (IMF) has published its latest annual assessment of the eurozone. IMF Managing Director Christine Lagarde acknowledged progress, but said that economic recovery remained elusive and that additional policy measures are required. In short, we are still very close to the edge – in IMF speak “a piecemeal approach (…) could further undermine confidence and leave the euro vulnerable to renewed stress”. The IMF analysis is stark “with unemployment at record highs, especially among young people, the risks of stagnation and long-term damage to potential growth are increasing”.

Commission Vice-President Olli Rehn welcomed the IMF’s report and four areas of suggested policy action, namely restoring the health of banks’ balance sheets, completing the banking union, taking further steps to support demand in the near term and pushing ahead on structural reforms. Rehn pointed to the Commission’s move to put in place “the next building block of the banking union a Single Resolution Mechanism’ by Wednesday of this week. As for supporting growth, Rehn explained that this would mean “stepping up the reform of the tax administration to boost its efficiency and autonomy. This is not only about fiscal revenus, it is also about social fairness”.

In Austerity, the history of a dangerous idea an analysis of the current crisis and the intellectual history of austerity, Marc Blyth spells out how this is a banking crisis first and a sovereign debt crisis second; while countries may have to shoulder some responsibility, their sins are largely sins of omission for their failure to regulate the banking sector.  Whilst bankers privatized their profits, the risks have been socialized , leaving the public, and taxpayers to pick up the pieces . In the words of Martin Wolf: ‘the banking industry has taken the public for a ride’. So when Vice-President Rehn talks about social fairness, I would ask him to spare a thought for those who didn’t attend the party and who are being told that they are picking up the bill.

Councillor Neil Swannick, a Labour member representing the Bradford ward, Manchester Chair of Greater Manchester Waste Disposal Authority NW and the EU Committee of the Regions, said: "With cuts approaching a third of the Council's revenue budget since the General Election in 2010, and at least 10% more cuts promised in the Coalition Government's 3-year spending review, the "safety net", protected even by Margaret Thatcher, is being pulled away. Yes, libraries and swimming pools have been hit, but for the poor and vulnerable without a voice, life's very essentials are at risk. Caught between local authority cuts and so-called Government welfare reform, those unable to manage their lives and their debts are left to quietly seek out charities providing food parcels."

The other galling notion is that the current cuts in a time of profound economic stress are to use the Commission’s oxymoron, leading to ‘growth-friendly fiscal consolidation’. This is a policy that has very unfair outcomes on those further down the income distribution pyramid who are more dependent on public services and who suffer most when these services are withdrawn. Unfortunately, Europe has placed itself in a self-imposed straight jacket, where it has limited freedom in making use of inflation or devaluation, other than the ‘internal devaluation’ which is allegedly so growth-friendly. As we can see this isn’t working, but we can also see that Europe (or those who seem to be leading Europe’s debate, the ECB and Germany), seem anxious to make the euro a type of gold standard, implacably bearing its weight on those with lower incomes. So please Vice-President Rehn, do not speak of fairness.

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