Just recently, the International Monetary Fund (IMF) boasted that it was almost able to double its lending capacity as several member economies pledged more funds. IMF Managing Director Christine Lagarde proudly announced that they were able to pool a total of $430 billion in additional funding, which could be used in case the euro zone needs another bailout.
These additional pledges came mostly from more stable and developed economies such as Japan, Britain, Saudi Arabia, South Korea, Australia, Sweden, Norway, Poland, Denmark, and Singapore. The only thing missing is a sizeable contribution from billionaire philanthropist Tony Stark, and we’ve got all the world’s wealthy superpowers combined to save the earth. Oh, I meant the euro zone!
Emerging economies such as the BRIC nations have also expressed their intentions to contribute additional funds, but they haven’t committed to particular amounts just yet.
The U.S., on the other hand, refused to shell out more money as Treasury Secretary Timothy Geithner reasoned out that the euro zone has to man up and take care of its own problems. He also pointed out that Europe is already a rich continent and that increased IMF lending capacity isn’t exactly what the euro zone needs to keep the region from going bust.
At best, the additional funding could act as a buffer in case the debt crisis worsens. This could be enough to keep financial markets from going berserk for the meantime, amidst the debt troubles that are currently brewing in Spain and Italy. In other words, the IMF’s increased lending capacity could calm the markets down in the short-term but it probably won’t be enough to keep the euro zone afloat in the long run.
What the euro zone really needs is to spur faster economic growth in order to lighten its debt burdens. As Geithner mentioned during the recent IMF meeting, euro zone must strike a balance between growth and austerity. For him, debt-ridden nations must avoid too much spending cuts since weaker economic growth could shrink tax revenues and worsen government deficits later on. Now that sounds like something Captain America would say!
However, euro zone governments are caught between a rock and a hard place. Although some European government officials probably think that Geithner makes a good point, their hands are tied since they are bound to a treaty that requires them to trim budget deficits. Unfortunately for them, their commitment to stricter austerity measures seems to be pulling them farther and farther away from restoring growth and financial stability.
As IMF director Lagarde noted, the euro zone still remains at the very center of the crisis. The IMF can only do so much to prevent a full-blown debt fiasco from spreading to the rest of the global economy, and it’s ultimately up to the euro zone governments to get their act together.