Only the IMF can solve the eurozone crisis

by Raghuram Rajan

Financial Times
September 26, 2011

The world markets expected concrete steps from Washington over the weekend on how governments would resolve the European crisis. They did not get it. Instead, the International Monetary Fund’s policy setting body asserted that the “Euro-area countries will do whatever is necessary to resolve the euro-area sovereign debt crisis”. Unfortunately, this statement seems to be based more on hope and prayer than on evidence.

Hope, unfortunately, cannot convince markets at times like these. With luck, Italy may get a credible government of national unity in the next few weeks, Spain will obtain a new government in November with a mandate for change, and Greece will do enough to avoid roiling the markets. But none of this can be relied upon.

So what needs to be done? First, eurozone banks have to be recapitalised. Second, enough funding has to be available so that Italy’s and Spain’s needs can be met over the next year or so, if the markets dry up. Third, Greece has to be managed in a way that does not infect the other periphery countries. All this requires financing – bank recapitalisation alone could require hundreds of billions of euros — but no new commitments were made in Washington.

More