Folha de São Paulo (Brazil), November 9, 2011
There have been news reports today that Brazil is once again considering a contribution to help Europe out of its financial crisis. Finance Minister Guido Mantega has denied reports that $10 billion was offered, but has indicated that Brazil would be willing to contribute something through the International Monetary Fund (IMF).
At $11,800 a year, Brazil’s per capita income is about one-third the income per person of the eurozone countries. Europe can help itself. In fact, Europe really needs to help itself, and the IMF is not helping Europe right now any more than it helped Brazil in the late 1990s. Lula’s government paid off all outstanding loans to the IMF in 2005 for good reason: to make sure that it wouldn’t have any further influence on Brazilian economic policy.
In Brazil’s case, the IMF was controlled by the U.S. Treasury Department. Today, with the majority of the IMF’s loans in Europe, Treasury is not calling the shots for that region; rather the European authorities are making the decisions. And they are even more ideologically right-wing than the IMF, which is really the junior partner in the continuing crisis unfolding in Europe.
The European Central Bank (ECB) is the worst offender in this case, refusing to live up to its responsibilities as a central bank. It refuses to participate in the fund that will be necessary to guarantee Italian bonds. This is a necessary part of resolving the crisis. Italy has to refinance some $491 billion worth of bonds over the next year. Financial markets have now pushed up Italy’s borrowing costs to record levels, with the yield on 10-year bonds closing at 6.77 percent on Tuesday. This rate must be brought down, or at least kept from rising, if Italy is to be kept from default, and the ECB has the power to do that but has so far refused. This is very different policy than the U.S. central bank, the Federal Reserve, which has created more than $2 trillion since the recession in the United States.
The current crisis is a result of fear in the financial markets that the European authorities are starting to do to Italy what they did to Greece. The European authorities pushed Greece into an impossible situation by forcing them to tighten their budget in a recession. This has caused the economy to shrink further – it will contract 5.5 percent this year. The shrinking economy means less revenue for the government, which means that they have to tighten their budget even more to make the target, and so on in a downward spiral. Now they have begun the same process in Italy; but Italy has five times the debt of Greece.
Perhaps Brazil and other countries that want to offer contributions to the IMF should take a lesson from the Fund itself: they should make their contributions conditional on a change in policy. Specifically, the money should only be made available if the European authorities cancel the vast majority of the Greek debt; bring down long-term interest rates for all of the weaker eurozone economies (Italy, Spain, Portugal, Ireland, and Greece); and reverse their macroeconomic policies to allow all of the troubled eurozone economies to grow their way out of this crisis.