IMF could do more for EU than ECB’s QE

IMF Managing Director Christine Lagarde.
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IMF Managing Director Christine Lagarde.

Have you ever thought of the IMF as a peacemaker?

Here is what Christine Lagarde, the IMF's managing director, was telling the warring Ukrainians last Wednesday (March 4): "… We are trying to help Ukraine with … a set of reforms, massive financial support, but all of that is really going to depend on how it stabilizes … the east … and how the … conflict stops." She went on to say that the fighting in the eastern part of Ukraine "has been a huge distraction" for the country's leaders who, in her view, "are really determined to reform the economy."

The message is clear: Stop fighting, strive for peace and we – the IMF and international investors – will help you to rebuild, reform and modernize your economy.

And here is the money. Ms. Lagarde announced that over the next four years $40 billion – half of that from the IMF – would be provided to support the Ukrainian economy.

Ukraine's lender of last resort

If there is peace, you can think of these $40 billion as seed money. With its vast and fertile land, its skilled labor force and a diversified (if rusty) industrial base this beautiful country could easily attract large private direct investment inflows.

The IMF is clearly playing a key role here, because it is hard to see how large-scale fund disbursements to support Ukraine's meaningful and sustainable economic reforms can be carried out unless the guns fall silent. With no other source of finance readily available, the IMF's political clout could be decisive in the successful implementation of the latest round of cease-fire and peace agreements negotiated in Minsk, Belarus, on February 12, 2015.

Read MoreUkraine's economic 'meltdown' just got worse

Europe would then be extricated from the claws of its old demons of division, exclusion and medieval savagery.

That is what some European leaders are counting on. Their foreign policy chief Federica Mogherini told a meeting of the group's top diplomats last Friday (March 6) that "… around our continent … cooperation is far better than confrontation." She was echoing increasingly pressing calls to stop Ukraine's fighting and restore Europe's unimpeded flows of commerce and finance.

All this puts the IMF in an interesting position. By forcing the warring parties in Ukraine to seek peace as a condition of economic survival, the IMF can also help the recovery of the European economy by removing obstacles to intra-regional trade that are costing hundreds of thousands of jobs.

Arguably, that would be of far greater help than the European Central Bank's (ECB) debasement of the euro with an avalanche of new liquidity that no area economy needs with an already record-low interest rate of 0.05 percent. Even Germany opposed that ill-conceived policy. Never an advocate of a weak currency, Germany does not need a sinking euro to maintain a trade surplus exceeding 7 percent of its economy.

For my part, I believe that there is no need for sweeping and desperate measures the ECB will begin implementing today. The euro area's demand for money is accelerating; its broad monetary aggregate M3 rose 4.1 percent in the year to January, a strong pickup from an annual growth rate of 3.1 percent during the fourth quarter of last year. The decline of loans to the private sector has almost ground to a halt, mortgage lending is improving, and so are bank loans to households and non-financial corporations.

Go Dutch

Looking at these numbers, a die-hard Dutch monetarist might say: Stop messing around, the monetary policy is working, it needs time to repair the damage to the banking system and the economy done by your past policy mistakes.

I would repeat: Amen.

With the cost of funds at 0.05 percent, a weak lending to the private sector reflects extremely bad credit risks and higher (and default-free) yields banks can get on loans to governments. Last January, for example, the euro area bank loans to governments increased 2.1 percent from the year earlier, while private sector loans declined 0.1 percent. That explains why a euro area country with a public debt of 147 percent of its gross domestic product (GDP) could borrow ten-year money last Friday at 1.35 percent – 89 basis points cheaper than the United States of America.

What's the solution here? The answer is: Change the policy mix. The monetary policy can't do everything. A less restrictive fiscal policy could help to spur aggregate spending and employment. That, in turn, would stimulate the demand for money and bank lending to acceptable credit risks – companies with a good sales outlook and people with stable employment.

But that would send Germans screaming. I read recently in respectable German media that they invented an "austerity growth model," with "Spain and Portugal as examples of the model's resounding success." They call these countries' rising poverty and respective unemployment rates of 23.7 percent and 13.5 percent a "resounding success?" Try cruelty. That might be a more fitting model description.

Under these circumstances, printing money – and a lot of it – is the path of least resistance. Or, in the euro area setting, this might also mean getting back at Germans, because the Europe's south could be telling the austere northern taskmasters that the ECB policy is not just for them.

Investment thoughts

The IMF could bring money and peace to Ukraine, delivering Europe from misery and senseless confrontations. A promising process is under way: Ukrainians have largely stopped killing each other and destroying their great country. A prospect of substantial and reliable support to rebuild their economy could be crucial in encouraging them to put the country back together.

That would make it possible to lift the current obstacles to intra-European trade and finances which, along with fiscal austerity, are destroying jobs and livelihoods.

Acting alone, the ECB's new round of easing won't make much difference to the real economy. But the soaring liquidity will push up already stretched market valuations, where some of the principal stock indexes, such as the euro stoxx 50, are currently trading at 19 times earnings.

Michael Ivanovitch writes about world economy, geopolitics and investment strategy: @msiglobal9