Why can't the IMF face up to the truth about the failing euro?

How sad it is that in order to get yourself admitted to hospital you have to shoot yourself in the foot first

By Jeremy Warner

I've been in Washington most of this week for the spring meeting of the International Monetary Fund. I wish I could say there was light at the end of the tunnel, but the reality is still deeply depressing. Sorry to use cliches, but two sayings spring to mind: fiddling while Rome burns, and re-arranging deck chairs on the Titanic.

In "The Economic Consequences of the Peace", the British economist, John Maynard Keynes, wrote that his preference in any negotiation or arbitration was for "violent and ruthless truth telling" but there has been very little evidence of that in this week's discussions. Instead of addressing the underlying causes of today's economic funk – the failing euro – debate has focused on marginal fiscal and monetary issues such as whether the UK and the US are consolidating too fast.

That the IMF's chief economist, Olivier Blanchard, and his managing director, Christine Lagarde, could think some minor loosening of the fiscal purse strings in the UK either appropriate or capable of getting growth going again, when there is such a deep seated crisis going on in Europe is not just odd, it is pitiful. I've already written about the wider failings of the IMF in confronting the worst economic crisis since the second world war , but there is a lot more to say about it.

Instead of forcing eurozone leaders to face up to the truth – that their project in its present form is failing not just them, but the whole world economy – the IMF busies itself with irrelevances such as whether the UK has the fiscal space for a little more debt fuelled demand management. Worse, it meakly goes along with attempts to sustain what is plainly in its current form a completely unsustainable endeavour.

One of the big "puzzles" under discussion this week at the IMF is why the massive degree of monetary stimulus applied to advanced economies over the past four years has gained so little traction. I would have thought the answer was obvious. You can have as much demand management as you like, but as long as underlying imbalances in the world economy go unaddressed and unresolved, companies and households are not going to have the confidence to spend and invest.

The biggest example of these problems lies in the eurozone. It's long been apparent that there are really only two permanent solutions to the single currency's malaise. Either it must break up, allowing the magic of free floating currencies to restore economic equilibrium to Europe, or it must move rapidly to a full-scale transfer union, where surplus nations subsidise deficit economies. Instead of forcing eurozone leaders to face up to this choice, the IMF acquiesces in sticking plaster solutions that fail to address the underlying sickness.

If you prevent relative prices moving in the way they must to restore balance in the European economy, which is what the single currency effectively does, then the whole process of economic correction becomes virtually impossible. Why are these things not being said, openly and honestly at the IMF? Why are the eurozone's political leaders being allowed to run away from a problem which is causing misery not just within their own borders, but throughout the industrialised world.

At a press conference on Friday, Oli Rehn, vice president of the European Commission, said the strategy of fiscal austerity was working. The eurozone's deficit would be halved from 6 to 3 per cent this year, allowing the pace of fiscal consolidation to slow from 1.5 per cent last year to 0.75 per cent next. This was slower than for the US, so he was going to take no lessons from anyone about undue harshness in the fiscal medicine that was being doled out.

Unfortunately, this is rather the nature of the problem. These are aggregated figures, substantially influenced by the fact that Germany, back at something like a balanced budget, is ceasing fiscal consolidation this year. The same is not true of weaker eurozone nations, for which there is very little let up. The eurozone is still a collection of 17 sovereign nations, some surplus and some deficit, but Rehn speaks of it as if it is one. His analysis is therefore ridiculous. If you were to aggregate the entire world economy, you would find it in a state of perfect balance. Yet as we know, there are huge pluses and minuses within it.

The present situation is hopeless. There is too much political capital, too many egos and careers, riding on the continuation of monetary union to be able to admit failure. The IMF was set up for dealing with international economic crises of just this sort. Yet confronted by the biggest crisis since the second world war, the fund has proved unequal to the test.

The crisis, I fear, is going to have to get very considerably worse before the collective resolve emerges to deal with its underlying causes. How sad it is that in order to get yourself admitted to hospital you have to shoot yourself in the foot first.