By Simon Johnson
Last weekend official Washington was gripped by euphoria, at least briefly, as people attending the IMF annual meetings began to talk about how much money it would take to stabilize the situation in Europe. At least one eminence grise suggested that 1.5 trillion euros should do the trick, while others were more inclined to err on the side of caution – 4 trillion euros was the highest estimate I heard.
This is a lot of money: Germany’s annual Gross Domestic Product (GDP) is only about 2.5 trillion euros, and the combined GDP of the entire eurozone is about 9.5 trillion euros. The idea is that providing a massive package of financial support would “awe” the markets “into submission” – meaning that people would stop selling their holdings of Italian or Spanish debt and thus stop pushing up interest rates. Ideally, investors would also give Greece and Portugal some time to find their way to back to growth.
But this is the wrong way to think about the problem. The issue is not money in the form of external financial support – provided by the IMF or other countries to parts of the European Union. The real questions are: will Italy get complete and unfettered access to the European Central Bank, and when will we know this? Continue reading