Well, I was wrong about the nominations for the IMF chiefdom. It looks as though China and the other emergent countries didn’t get behind a candidate of their own. No new names of any weight emerged yesterday and it looks as though Christine Lagarde will be duly appointed.
She will have an enormously stressful job. Politically, she’ll be under sideways pressure from President Sarkozy and many others to throw much more money at the Eurozone. Her new deputy in the autumn (presently John Lipsky) will almost certainly be American, as are most of the economic advisors under her. The latter will certainly not be suggesting anything inimical to the Eurozone, but they won’t necessarily be over-helpful either. At the highest political level, America is becoming increasingly cool to Europe and, as by far the largest fund-provider to the IMF but yet deeply in debt itself, America is hardly likely to be a generous benefactor as the Eurozone tries to save Greece, Portugal, Spain and Ireland (and probably Italy) from defaulting sooner or later.
If any entity is going to save the Eurozone from now onwards it’s going to be China. It’s in its interests to do so, Europe being a significant export market for its consumer goods, and still necessary to supply China with specialized producer goods that it doesn’t yet make for itself. China has already been buying Greek, Spanish and Portuguese bonds to keep their governments financially alive and will very possibly do so for Ireland, too.
However, China will do the minimum necessary to try and help the Eurozone. It won’t want to help promote the euro as a world trading currency and thus a strong competitor to the dollar. For the past couple of years China has been promoting its own renminbi (yuan) as a contender and, what’s more, with the help of some of the largest banks in the West, such as HSBC.
However, this doesn’t preclude the distinct possibility that the Eurozone might collapse of its own accord anyway. It could easily do so. Because of austerity cutbacks already, Greece is in constant social turmoil, mainly by its public service unions, and a left-wing revolutionary government (with a military counter-coup more than likely) could take control which could then default on its international debts just as Argentina did in 2002. This would be a body blow to many European banks, mainly Germany and French, and the European Central Bank itself. This would precipitate a financial catastrophe quite as bad as, and on top of, the 2007/8 disaster. We are still many years away recovering from this.
If Christine Lagarde becomes the MD of the IMF she will have the most stressful job imaginable. One can only wish her all the support she will need. But she’ll need to be a miracle worker to succeed. The basic problem is far greater than the Eurozone, but that of world-wide currency inflation itself. That began almost a century ago when most of the significant currencies of the world went off the gold standard, finally compounded by President Nixon’s decision to take the dollar off the gold standard in 1971. Governments — and particularly the American government — all too easily took to printing money whenever they got into difficulties.
We have had inflation ever since. Significant currencies such as the dollar, the pound and the Swiss franc are only worth 3% of what they were in 1914. That is, when compared with basic commodities such as a loaf of bread or a ton of copper. Instead, because of industrial efficiencies, these currencies ought to be worth a lot more compared with the price of commodities. Until a rock-solid world currency is re-established we have no chance of stabilizing the massive imbalances which the G20 countries are trying to do. Perhaps Christine Lagarde can knock their heads together. Miracles can happen occasionally.