Folha de São Paulo (Brazil), September 27, 2011
Last week Brazilian Finance Minister Guido Mantega proposed that the BRICS countries offer help to Europe, either through the International Monetary Fund (IMF) or by buying up European bonds. I can understand the sentiment: The European authorities have created a financial crisis that is already slowing the world economy and could potentially have even worse effects. This could hurt the BRICS countries, including Brazil.
But the BRICS countries would not necessarily help Europe by throwing money at them. If you have a family member who is addicted to heroin, giving them heroin is not the best solution. It is better to get them into drug treatment.
Europe’s policymakers – the so-called “Troika” of the European Commission, European Central Bank (ECB), and the IMF – have a very harmful habit that needs to be broken. It is their addiction to austerity. Of course the Greek debt is not payable and needs to be restructured in an orderly way. But the Troika’s austerity policies have increased Greek debt from 115 percent of GDP when the first IMF program was agreed upon in May 2010, to 189 percent projected for next year.
The latest crisis was triggered by the IMF’s refusal to release an 8 billion euro loan installment until the Greek government implemented further painful, counter-productive budget tightening. This raised the possibility of a chaotic, unilateral default by Greece if these measures could not pass the Greek parliament. The European authorities have provoked other crises recently by threatening the Italian parliament as well.
The European authorities have the capacity to deploy all the financial resources they might need to resolve the current crisis. They can restructure the Greek debt, and push down interest rates on the bonds of troubled countries like Italy, Spain, Portugal and Ireland. It is therefore not primarily a debt crisis that Europe is facing, but a crisis of policy failure. They don’t need money from abroad. Under current conditions, they can create money as needed, for example, to recapitalize their banking system. The U.S. Federal Reserve has created more than $2 trillion since the U.S. recession began, without any noticeable effect on inflation. The ECB can act similarly: The IMF projects that inflation in the eurozone will fall from 2.5 percent this year to 1.5 percent next year.
If the BRICS countries want to really help Europe, they can offer zero or low interest loans in hard currency to the troubled countries that want to pursue an expansionary fiscal policy. If done correctly, this would allow them to escape the harmful conditions that the European authorities are imposing on them, and grow their way out of their debt problems. Of course Greece would have to default on a lot of its debt to take advantage of this alternative; but the other countries would not. If the troubled countries in Europe had an alternative source of lending, the European authorities would have to rethink their failed strategy. In this way the BRICS countries could help save Europe from the incompetence of their policymakers.