U.S.-Taliban talks only “exploratory”: Afghan envoy


Taliban fighters ride on motorbikes in an undisclosed location in Afghanistan July 14, 2009. REUTERS-Stringer
Afghanistan's President Hamid Karzai reviews the troops during a ceremony as he arrives at Orly airport near Paris January 27, 2012. REUTERS-Gonzalo Fuentes

1 of 2. Taliban fighters ride on motorbikes in an undisclosed location in Afghanistan July 14, 2009.

Credit: Reuters/Stringer

By Serena Chaudhry

ISLAMABAD | Thu Feb 16, 2012 11:05am EST

(Reuters) – The Afghan Taliban and the United States have made only “exploratory” contacts for possible reconciliation which do not involve the Kabul government, the Afghan ambassador to Pakistan said on Thursday.

The Wall Street Journal said that the U.S. and Afghan governments had begun secret three-way talks with the Taliban, based on an interview it conducted with Afghan President Hamid Karzai.

“I must emphasize that word ‘exploratory’. They are not talks,” Afghan ambassador to Pakistan Umar Daudzai told Reuters.

“When there’s talks, it’s supposed to be between the Afghan government and the Taliban. We have not reached to that stage although we wish to reach to that stage.”

The Wall Street Journal quoted Karzai as saying the Taliban were “definitively” interested in a peace settlement to end the 10-year war in Afghanistan, and that all three sides were now involved in discussions.

It said Karzai had declined to specify the location of the talks or go into further detail, saying he feared this could damage the process.

Taliban spokesman Zabihullah Mujahid also said the group had not held talks with the Karzai government.

The Afghan Taliban announced last month it would open a political office in Qatar, suggesting the group may be willing to engage in negotiations that could likely give it government positions or official control over much of its historical southern heartland.

“At a high level, (there are) secret talks and American-Taliban talks. I’m not aware of any other than the Qatar process,” said Daudzai.

“The Qatar process is exploratory contacts between Taliban and the United States.”

The Afghan ambassador said the Kabul government’s contacts with the Taliban were limited to communications between low-level officials and local insurgent commanders.

Washington wants to accelerate contacts with the Taliban so it can announce serious peace negotiations at a NATO summit in May, officials say, in what would be a welcome bright spot in Western efforts to end the war in Afghanistan.

The United States hopes it can declare a start to authentic political negotiations between the Afghan government and the Taliban at the May 20-21 summit in Chicago, after a year of initial, uncertain contacts with militant representatives.

It would be a needed victory for the White House and its NATO partners in Afghanistan as they struggle to contain a resilient insurgency and train a local army while moving to bring their troops home over the next three years.

(Additional reporting by Chris Allbritton in ISLAMABAD and Rob Taylor in KABUL; Editing by Michael Georgy and Nick Macfie)

Thai police charge 2 over Bangkok blasts as Iran denies involvement


Thai bomb squad officials inspect the site of an explosion in Bangkok on February 14, 2012.

Thai bomb squad officials inspect the site of an explosion in Bangkok on February 14, 2012.

STORY HIGHLIGHTS
  • A Thai official says materials used in Bangkok bombs are similar to those in India attacks
  • The authorities charge 2 Iranians in relation to the blasts in Bangkok
  • Two more people connected to the explosions are still at large, the police say
  • Iran denies accusations by Israel that it was behind the bombings

Bangkok, Thailand (CNN) — Thai authorities on Wednesday charged two Iranians in relation to a string of blasts that hit Bangkok the day before as Tehran denied accusations by Israel that it was behind the explosions.

A Thai official also drew a tentative link between the Bangkok bombings and attacks earlier this week aimed at Israeli officials in India, saying the materials used in the explosive devices were similar.

The authorities in Thailand said they are still on the hunt for two other people, one man and one woman, in connection with the blasts in Bangkok, which wounded at least five people.

The first bomb Tuesday went off in a rental house, believed to be leased to foreigners, according to Thai authorities. After the blast, two of the men left the scene while a third detonated two more bombs — one when a taxi driver refused to give him a ride, and another when he tried to throw a bomb at police officers as they closed in on him.

The last bomb exploded near the man, blowing off one of his legs, the authorities said. He was taken to Chulalongkorn General Hospital for treatment and Iranian documents were found on him.

Another man arrested at the airport is holding an Iranian passport and is one of the two who left the scene, the Thai government said, adding that he was identified as Mohammad Hasai, 42, and was about to leave for Malaysia.

The authorities charged those two men with several offenses, including illegal possession of explosives and intent to kill a police officer, said Gen. Pansiri Prapawat, deputy police commander.

The third man and the woman, who the authorities say they believe was renting the house, are still at large. The man is believed to have left the country, possibly for Malaysia, said Thitima Chaisaeng, a spokeswoman for the Thai government.

The Israeli defense minister on Tuesday blamed Iran for the bombings in Bangkok, a day after attacks against the country’s diplomats in India and Georgia.

“The attempted terror attack in Thailand proves once again that Iran and its proxies continue to operate in the ways of terror and the latest attacks are an example of that,” said the defense minister, Ehud Barak.

But Iran on Wednesday denied Barak’s accusation, state media reported.

Ramin Mehmanparast, a spokesman for the Iranian Foreign Ministry, “condemned the blasts and said that Israeli agents are often the perpetrators of such terrorist acts,” Press TV said in an article on its website.

Israeli Foreign Ministry personnel based overseas have been on alert in recent weeks to the heightened possibility of attacks at Israeli facilities by Hezbollah, the Lebanese Muslim militant group and political party backed by Iran.

Sunday marked the fourth anniversary of the death of Hezbollah leader Imad Mugniyah in a car bombing in Damascus, Syria. Hezbollah holds Israel responsible for his death and has vowed revenge.

Israeli police spokesman Micky Rosenfeld said that the level of alert in the country had been raised following a security assessment after the overseas incidents in New Delhi and Tbilisi, the capitals of India and Georgia.

The alert means patrols will be heightened in and around various public areas inside Israel, and around Israeli embassies and offices worldwide.

In the Monday incidents, a device attached to an Israeli Embassy van in New Delhi exploded and injured four people. Another device was found on an embassy car in Tbilisi but it was safety detonated.

Iran has also denied involvement in those events, which are still being investigated.

The materials used in the Bangkok bombs had many similar characteristics to those used in India, said Wichean Potephosree, secretary-general of the Thai National Security Council.

The Israeli government issued a travel advisory this year for citizens traveling to Thailand after Thai security officials arrested a man in January connected with a planned attack in the country.

The police charged the man, Atris Hussein, after finding “initial chemical materials that could produce bombs” in an area just outside Bangkok. Police said Hussein, who also holds a Swedish passport, led them to the location.

The authorities are accusing Hussein of trying to attack spots in Bangkok that are popular with Western tourists and say he is believed to belong to Hezbollah, the Shiite Muslim group active in Lebanon that the United States views as a terrorist organization.

Potephosree said Wednesday that the Thai authorities do not believe there is any link between Hussein and the blasts in Bangkok on Tuesday.

Moody’s warns may cut AAA-rating for UK and France


A pedestrian walks past a mural by French street artist Tilt, which includes the lyrics to the Sex Pistols ''Anarchy in the UK'' in the Shoreditch area of London January 14, 2012. REUTERS/Andrew Winning

(Reuters) – Rating agency Moody’s warned it may cut the triple-A ratings of France, Britain and Austria and it downgraded six other European nations including Italy, Spain and Portugal, citing growing risks from Europe’s debt crisis.

Moody’s move was less aggressive than rival agency Standard & Poor’s, but its action puts London’s prized top credit rating in jeopardy for the first time.

It said it was worried about Europe’s ability to undertake the reforms needed to address the crisis and the amount of funds available to fight it. It also said the region’s weak economy could undermine austerity drives by governments to fix their finances.

The euro and sterling fell after the announcement, with pound falling 0.4 percent to $1.5703 and the single currency dipping 0.3 percent to $1.3154. European and U.S. equity index futures were also lower.

The U.S. rating agency said it changed the outlooks for the ratings of France, Britain and Austria to negative due to “a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns’ balance sheets.”

Germany’s top-tier rating was described as “appropriate” by Moody’s, and it affirmed the triple-A rating on the euro zone’s bailout fund, the European Financial Stability Fund (EFSF).

Moody’s, which said late last year it was reconsidering its European ratings, cut the ratings of Italy, Portugal, Slovakia, Slovenia and Malta by one notch. It downgraded Spain by two notches.

Moody’s said the scope of the downgrades was limited due to “the European authorities’ commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence.”

The announcement came a day after Greece’s parliament approved a deep new round of budget cuts in the hope of securing new bailout funds and avoiding a chaotic default in March.

Bart Oosterveld, managing director at Moody’s sovereign risk group, declined to comment on the state of the negotiations between Athens and its creditors, but said that if Greece were to leave the European Union the impact on financial markets and credit ratings “would be quite profound.”

And he warned that European credit markets may still deteriorate despite efforts by the European Central Bank to ease financing pressures with its three-year refinancing operations.

“The markets are better in the short term but probably not in the longer term,” Oosterveld told Reuters in an interview. “We think the markets remain quite fragile.”

The rating outlooks of the nine countries affected by Moody’s action was set to negative, “given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness,” Moody’s said.

BRITAIN, FRANCE UNDER PRESSURE

Britain’s finance minister responded by saying the country must keep its promise to slash its large budget deficit.

“This is proof that, in the current global situation, Britain cannot waver from dealing with its debts,” Finance Minister George Osborne said. “This is a reality check for anyone who thinks Britain can duck confronting its debts.”

The government in Britain has come under increasing pressure to soften its austerity measures to give a stalling economy room to breathe.

The French government said it would press ahead with its policies to improve competitiveness and growth while reducing the government deficit.

“The government is determined to press ahead with its actions to boost growth and competitiveness, notably the reform of the financing of welfare, of employment and the reduction of public deficits,” Finance Minister Francois Baroin said in a statement.

The precarious state of European sovereign finances was underlined on Monday, when the head if China’s sovereign wealth fund brushed aside an appeal from German Chancellor Angela Merkel to buy European government debt, saying such bonds were “difficult” for long-term investors.

A retreat from European government debt has already been boosting relatively high-yielding Australian and New Zealand debt, as cashed-up Asian sovereign wealth funds and other major bond investors look for safe havens to diversify their holdings.

Reserve Bank of Australia Assistant Governor Guy Debelle said on Tuesday that net purchases of Australian debt by foreigners over the first three quarters of 2011 amounted to more than 3 percent of gross domestic product, markedly larger than Australia’s current account deficit.

“Our discussions with market participants suggest that a sizeable share of recent purchases has been by sovereign asset managers,” said Debelle.

Moody’s move on Monday follows one last month by Standard & Poor’s, which stripped France and Austria of their triple-A status, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia and Slovenia were downgraded. S&P also cut the EFSF by one notch.

Also in January, rating agency Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain, indicating there was a 1-in-2 chance of further cuts in the next two years.

(Reporting by Rodrigo Campos in New York, Daniel Flynn in Paris, Matt Falloon in London, Alex Richardson in Singapore and Wayne Cole in Sydney; Editing by Leslie Adler, Andrew Hay andAndre Grenon)

Al Qaeda leader backs Syrian revolt against Assad


 

 Al Qaeda's Ayman al-Zawahri speaks from an unknown location, in this still image taken from video uploaded on a social media website June 8, 2011. REUTERS/Social Media Website via Reuters TV

Al Qaeda’s Ayman al-Zawahri speaks from an unknown location, in this still image taken from video uploaded on a social media website June 8, 2011.

(Reuters) – Al Qaeda leader Ayman al-Zawahri, in a video recording posted on the Internet on Sunday, urged Syrians not to rely on the West or Arab governments in their uprising to topple President Bashar al-Assad.

In the eight-minute video, entitled “Onwards, Lions of Syria” and posted on an Islamist website, the Egyptian-born Zawahri also urged Muslims in Turkey, Iraq, Lebanon and Jordan to come to the aid of Syrian rebels confronting Assad’s forces.

“Wounded Syria still bleeds day after day, while the butcher, son of the butcher Bashar bin Hafiz (Hafez al-Assad), is not deterred to stop,” Zawahri, wearing his white turban and seated against a green curtain, said.

“But the resistance of our people in Syria despite all the pain, sacrifice and bloodshed escalates and grows,” he added.

Zawahri took command of al Qaeda after Osama bin Laden was killed by U.S. special forces in a raid in Pakistan last May.

A Muslim should help “his brothers in Syria with all that he can, with his life, money, opinion, as well as information,” Zawahri says.

Syrian forces bombarded districts of the city of Homs on Saturday in a campaign to crush the revolt against Assad, whose ally Russia said it would not support an Arab League peace plan circulating at the United Nations.

Activists said seven people were killed in the latest attacks in a week-long government siege of Homs, which has been at the heart of the uprising which broke out 11 months ago.

“Our people in Syria, don’t rely on the West or the United States or Arab governments andTurkey,” Zawahri said in what is believed to be his second such message to Syrian protesters.

“You know better what they are planning against you. Our people in Syria, don’t depend on the Arab League and its corrupt governments supporting it.”

Arab foreign ministers will discuss a proposal next week to send a joint U.N.-Arab mission to Syria, after a uniquely Arab team failed to end Assad’s crackdown on protests.

“If we want freedom, we must be liberated from this regime. If we want justice, we must retaliate against this regime,” Zawahri said.

“Continue your revolt and anger, don’t accept anything else apart from independent, respectful governments.”

In July, Zawahri urged Syrian protesters to direct their movement also against Washington and Israel, denouncing the United States as insincere in showing solidarity with them.

Earlier this month, another video with Zawahri appeared on Islamist forums, announcing Somali militant group al Shabaab was joining its ranks in an apparent bid to boost morale and sharpen a threat to Western targets.

(Reporting by Martina Fuchs; Editing by Sami Aboudi and Michael Roddy)

Greece must do “whatever it takes”


greece

Greek protesters threw stones and firebombs at riot police who responded with tear gas in Athens as clashes erupted on the sidelines of a protest against new austerity cuts.

NEW YORK (CNNMoney) — The Greek government faces a crucial test this weekend as the nation’s parliament is set to vote Sunday on austerity reforms needed to qualify for a second bailout.

Greek Prime Minister Lucas Papademos outlined the reforms Friday in remarks to members of his cabinet, saying the nation is facing a time of “historic responsibility.”

“Any other development would be disastrous,” he said. “It goes without saying that anyone who disagrees and does not pass the new program cannot remain in the government.”

A handful of Greek politicians seemed to take Papademos at his word. Four members of the far-right LAOS party, the smallest member of the governing coalition, handed in their resignations Friday.

Meanwhile, union-backed protests in Athens turned violent as hooded youths began throwing stones and launching Molotov cocktails at the police, who responded with stun grenades and teargas.

The austerity program is a prerequisite for Greece to qualify for a second bailout of €130 billion from its troika of lenders at the European Union, International Monetary Fund and European Central Bank.

Greece needs the money to avoid a potential default on a €14.5 billion bond redemption in March.

After a week of political wrangling, Papademos and the members of his governing coalition agreed Thursday on the politically unpopular reform package. But euro area finance ministers were not satisfied and set out additional conditions before they will sign off on more bailout money.

Europe’s debt crisis: Where things stand

First, the Greek Parliament must approve the reform program Sunday. Then, the Greek government must identify an additional €325 million worth of “structural expenditure reductions” to ensure that its fiscal targets are achieved. And finally, the nation’s political leaders need to provide “strong assurances” that the reforms will be implemented even after elections are held later this year.

“In short, no disbursement without implementation,” said Jean-Claude Juncker, who heads the Eurogroup of 17 eurozone finance ministers.

The thinly-veiled ultimatum must be met by next Wednesday, when the Eurogroup will hold another meeting to review Greece’s progress, said Juncker.

Assuming the conditions are met, Juncker said the ministers should be able to make the necessary “political decisions” to release loan guarantees from the eurozone bailout fund, the European Financial Stability Facility.

The latest delay highlights the growing frustration among top EU officials with the lack of progress Greece has made toward paying off its debts and restructuring its economy.

The nation at the center of Europe’s debt crisis, Greece has struggled to follow through on the conditions of its 2010 bailout as the Greek economy has sunk deeper into recession.

“We cannot live with a system where promises are made and repeated and repeated and where the implementation measures are, from time-to-time, too weak,” said Juncker. “So we are insisting on a real, true implementation.”

Papademos told cabinet members Friday that the reform program is designed to restore the nation’s economic competitiveness and boost job growth.

It also aims to stabilize Greek government finances by cutting spending by 1.5% of economic output this year. That will include a new tax system and “adjusted” pensions for retired government workers, among other “structural reforms.”

In addition, the program calls for at least €19 billion in additional revenues from the privatization of state assets. It also contains measures to recapitalize Greek banks and boost lending.

The program seeks to produce a primary budget surplus of 4.5% this year, and shrink the nation’s deficit by 7% over the next few years. It also aims stabilize the economy next year and help revive growth by 2014.

But even if the package is approved Sunday by the Greek Parliament, that may not be the end of Greece’s bailout saga. The German Parliament must also approve the disbursement of additional EFSF funds.

What’s next for Europe?

In addition, Greece needs to seal a deal with private sector creditors towrite down €100 billion worth of Greek government bonds and execute a debt exchange that would leave investors with a loss of up to 70%.

Olli Rehn, the top economic and monetary official at the European Commission, said the private sector deal is “practically finalized” and is expected to be made official next week along with the overall reform package.

A spokesman for the Institute of International Finance, which represents the commercial banks and investors that hold Greek bonds, welcomed the progress and said the organization looks forward to finalizing the agreement.

The writedown will help reduce Greece’s debt burden to 120% of gross domestic product by 2020, from about 160% currently, said Rehn. But he acknowledged that timing is key, since any delay could put Greece at risk of a default in March.

“Yes, we have a shortage of time, but we are still within the schedule,” said Rehn.

He also suggested that the EU will begin playing a bigger role in overseeing the Greek government’s implementation of the proposed reforms.

The Greek government needs to take “genuine ownership” of the second bailout program, Rehn said. To that end, the EU will “further strengthen our capacity on the ground in Athens both in terms of monitoring and surveillance.”

The EU will provide “technical assistance” on matters including fighting tax evasion and the privatization of state assets, he said. In addition, EU officials are considering a plan to put Greece’s bailout funds in an escrow account as part of a plan to ensure compliance, he added.

Obama compromise amid Catholic contraception anger


President Obama: “No woman’s health should depend on who she is, or where she works, or how much money she earns”

The White House has announced modified plans to require all women to have access to contraception, attempting to stem anger from Catholic leaders.

US President Barack Obama said the policy “saves lives and saves money”.

Catholic leaders have been angered by the new rule, which required Church-linked institutions to offer health insurance including birth control.

But the White House changed the scheme to allow health insurers to provide cover directly if employers object.

Speaking at the White House, President Obama said: “No woman’s health should depend on who she is or where she works”.

The adjustment to the policy would mean Americans would not have to choose between “religious liberty and basic fairness”, he said.

Under the new plan put forward by the White House health insurance companies, rather than the employer, will be required to offer contraception directly to employees of religious-linked institutions if requested.

The institutions – such as universities or hospitals – would not be required to subsidise the cost of offering birth control to their employees, nor would they be asked to refer them to organisations that provide it.

Women could obtain contraceptives directly from their insurance provider, free of charge, the White House said.

The adjustment to the policy “accommodates religious liberty while protecting the health of women”, the White House added.

Institutions will have one year to phase in the new scheme.

‘Unprecedented incursion’

Churches and other houses of worship had already been given a waiver under the law, but arms-length institutions including universities and hospitals were not exempt.

The rule stemmed from the terms of the Affordable Care Act, the healthcare reform bill passed amid partisan rancour in 2010. The White House says most states already have similar laws relating to contraception on their books.

The debate has pushed social issues to the fore during an election season so far dominated by the US economy, correspondents say.

Outraged Catholic leaders said that the provision would force them to violate religious beliefs.

Under the original terms of the ruling, Church-linked institutions would have had to cover birth control costs in their health insurance plans.

But critics have argued this would impinge on religious institutions’ constitutional right to freedom of religion.

Word of the compromise came shortly after top Republicans joined the outcry against the contraception rule.

“It’s not about contraception, it’s about economic liberty, it’s about freedom of speech, it’s about freedom of religion, it’s about government control of your lives,” presidential contender Rick Santorum said at a conservative summit on Friday. “It’s got to stop.”

On Wednesday, House Speaker John Boehner called for legislation to prevent the rule coming into force.

The uproar began over the weekend, after US Health Secretary Kathleen Sebelius defended the policy in an editorial for USA Today.

Catholic bishops called for the rule to be dropped, including Archbishop Timothy Dolan of New York, who wrote in an editorial for the Wall Street Journal that the mandate was “an unprecedented incursion into freedom of conscience”.

The Obama administration has sought to portray the issue as a balance between religious freedoms and preventing discrimination under the new healthcare law.

Shrink the eurozone to save it


Protesters march against austerity cuts Thursday in front of the Greek Parliament in Athens.
Protesters march against austerity cuts Thursday in front of the Greek Parliament in Athens.

STORY HIGHLIGHTS
  • Desmond Lachman: Europe’s leaders keep trying to prop up the euro currency union
  • He says it will be impossible to preserve current zone in a time of austerity, no growth
  • It would be smarter to create a new, smaller currency union of healthier nations, he says
  • Lachman: Nations on the periphery would be able to devalue their own currencies

Editor’s note: Desmond Lachman, a resident fellow at the American Enterprise Institute, is a former deputy director of the International Monetary Fund’s Policy Development and Review Department.

       With each passing day, Greece’s economic and political malaise deepens despite one massive International Monetary Fund-European Union bailout package after another to keep that country afloat. And with each passing day, as the Greek economy continues its downward spiral under the weight of externally imposed draconian budget austerity, there is the increased risk that a disorderly Greek euro exit could result in real contagion to the rest of the European periphery and especially to Italy, an otherwise solvent country.

This has to raise a basic question: Would not the European core countries be better served by proactively taking action now to form a smaller and more enduring currency union than the presenteurozone? And would such action not be preferable to continuing with the pretense that the euro can be preserved in its present form, which runs the real risk of a disorderly and costly unraveling of the common currency?

Sadly, the IMF and EU’s heroic, if quixotic, efforts to keep Greece afloat with a second 130 billion-euro bailout package that has now finally been agreed upon, are all too suggestive that European policymakers remain in denial that Greece will soon be forced to exit the euro.

This is all the more lamentable since there is virtually no prospect the IMF’s present prescription of further hair-shirt fiscal austerity within Greece’s euro straightjacket is going to be any more successful in stabilizing the Greek economy than was the application of the same policy prescription over the past two years.

One would have thought by now that the IMF and Europeans would have grasped how politically unsustainable is their Greek policy prescription, particularly considering that the Greek economy is now in a virtual state of collapse.

January’s European Summit also provides the strongest of evidence that European policymakers seem to have learned little from their unfortunate Greek experience. For rather than recognize that the internal and external imbalances of countries such as Greece, Portugal, Ireland and Spain have reached such large proportions that make it almost inevitable these countries will be forced both to default and to exit the euro, European policymakers are striving to preserve the euro very much unchanged in its present form.

They are doing so by proposing that all countries should adopt constitutional balanced budget amendments and sign up to legally binding budget-deficit reduction programs that are to be externally monitored. It is supposed that after several years, once the desired degree of deficit reduction is eventually attained, the present monetary union could move toward a full fiscal union that would provide the firmest of underpinnings to the existing currency union.

The fly in the ointment is that to reduce the large public-sector imbalances in the European periphery would require the early restoration of economic growth in those countries.

However, the severe public-sector belt-tightening across all euro-member countries (within the constraints of euro membership that precludes currency devaluation as a way to boost exports) is a sure recipe for a deep and prolonged European recession. And as Greece’s experience over the past 18 months would attest, a deepening economic recession puts deficit-reduction targets well out of reach, increases a country’s public-debt service burden and heightens political opposition to staying the austerity course.

The futility of excessive budget austerity in a fixed exchange rate system is especially the case when one considers the overall European economy is already showing signs of considerable weakness and when the envisaged degree of budget tightening is extraordinarily large. It is for example being proposed that Italy undertake budget cuts and revenue increases amounting to nearly 2 percentage points of gross domestic product a year in each of the next two years, while for Greece, Ireland, Portugal and Spain the proposed budget adjustment is more on the order of 3 percentage points of GDP a year in 2012 and 2013.

At the best of times, attempting to apply multiyear budget adjustment of such a large scale would run the risk of a prolonged and deep economic recession. However, these are not the best of times in Europe given a weak external economic environment and the likelihood of a European credit crunch over the next year as European banks sell assets and restrict credit in an attempt to strengthen their balance-sheet positions.

As if to underline the futility of severe budget tightening in a fixed exchange rate system, for the year ahead the IMF is forecasting a serious deepening in the European periphery’s recession. The most disturbing aspect of the IMF’s latest economic forecast is that Italy and Spain, Europe’s third- and fourth-largest economies, are both expected to shrink by around 2% in 2012. This is almost certain to cause large budget-deficit overruns in both of these countries and to raise questions anew in the markets about these two countries’ debt sustainability.

Against this background of a slow-motion European train wreck one has to wonder whether Germany, France and the other north European-member countries should not avail themselves of those provisions of the Lisbon Treaty that allow countries to exit the union voluntarily. Doing so in unison would afford them the opportunity to bind themselves in a new currency union with stronger underpinnings than the current currency union, including an early move to a true fiscal union that might involve the joint issuance of euro bonds.

A significant though not insurmountable legal obstacle to the formation of a new smaller currency union among the stronger northern European economies is posed by the existing Lisbon Treaty. While that treaty provides that while countries can exit the present currency union either individually or in unison, doing so would require them to leave the EU as well. For that reason, should the core countries decide to leave the currency union in unison they would also need to approve a parallel treaty rapidly, which would provide for the maintenance among themselves of the same present trade arrangements that they have within the EU. Such a course of pre-emptive action would certainly be preferable to a disorderly breakup of the current monetary union.