6/27/2012 6:40 PM ET|
The United States of Europe?
The Continent's leaders try again to hammer out a way to save the euro, and closer ties are the only answer. The alternatives are too painful for their economies -- and the globe's.
If you're like most Americans, you couldn't care less about Europe. After all, they're just a bunch of socialists with cushy retirements getting their comeuppance, right?
And with yet another summit to save the eurozone set for this week -- the 19th such summit in two years -- people are ready to refocus on more important things, like who's going to win "The Bachelorette" or where to buy good fireworks.
But the eurozone's two-year-old debt crisis and all of its political machinations really matter. Seriously.
The endgame for all this will very likely see the eurozone tighten into something resembling the United States of Europe with increased political, fiscal and financial cohesion. As I'll explain below, Germany, France, Italy and Spain have no choice but to increasingly cede sovereign power to Brussels, de facto capital of the European Union. Weak countries like Spain can't afford to go it alone. And strong countries like Germany can't afford the economic turmoil and banking losses that would result from ending or exiting the euro.
All this matters because the eurozone accounts for 13% of the global economy. It matters because the euro is the world's second-largest reserve currency, which, after the dollar, is the most traded currency in the foreign exchange markets. It matters because what's at risk here is far greater that what was at risk in the mortgage meltdown.
Right now, the face value of euro-denominated interest rate and currency derivatives (assets based on other assets, like stock options) totals some $190 trillion, according to Capital Economics. For comparison, there were $7.5 trillion worth of mortgage-based derivatives swishing around during 2008 and 2009 crisis that nearly crushed the global financial system. That means there's a lot more at risk now, and the stakes are much, much higher.
So even if you like ketchup with your freedom fries and your football with helmets and shoulder pads, everyone in America should be hoping and praying Europe gets it together soon. Preferably this week.
We are them, and they are us
More than that, Europe's crisis is a mature manifestation of the same debt and deficit problem we face in the land of Stars and Stripes, with a few key differences. Uncompetitive economies with bloated public sectors gorged on cheap credit, suffered a banking crisis as loans went bad and have now reached the limit of debt their economies can support. Bad debt that started with consumers, passed to the banking system and has now been assumed by an overly large state. Sound familiar?
And now, we're both in the grips of a Japanese-style debt deleveraging, balance-sheet recession with no capacity to stoke our economies with cheap credit and no political appetite for short-term stimulus, since people are obsessed with minimizing debt, not maximizing profit.
While the U.S. Treasury is still having cash thrown at it by the capital markets (which are willing to buy bonds at negative interest rates, after adjusting for inflation), Europe's ability to fund itself is drying up. Countries are losing the ability to fund the short-term stimulus they need, be it spending on things like roads and bridges or forestalling tax hikes.
Thus, European nations must find a solution to their funding problems first.
The next step, as I've explored in other columns on the balance-sheet recession (see "The world's $8 trillion debt hole"), is growth. There is no other way to fix the debt-to-GDP problem at the heart of the sovereign debt crisis than to grow the gross domestic product quickly while slowly whittling down the debt. In other words, short-term stimulus -- spending -- must be combined with medium-term commitments to address structural drivers of the deficit (things like public pensions, unfunded entitlements, uncompetitive workforces and out-of-control health care costs).
Here at home, it would be via investment in things like infrastructure, education, job training and making the health care system more efficient. In Europe, it would be encouraging consumption and moderate wage inflation in Germany.
But if you look only to austerity by slashing spending and hiking taxes, and ignore the need to stimulate growth (the strategy of hard-right conservatives in Germany and in Washington), you get results like the 1937 double-dip, Greece's five-year-old austerity-driven nightmare recession, or the $570 billion funding gap Spain now faces (both banks and the government) through 2014, according to RBS estimates.
Pleasing Germany's Merkel
Right now, Spanish and Italian borrowing costs are nearing unsustainable territory, and the new Greek government is demanding concessions on the strict budget austerity requirements imposed on it as part of its bailout agreement. Action is needed on a first step of pushing down eurozone borrowing costs and restoring the ability of Spain and Italy to fund their deficits and backstop their banks at sustainable interest rates.
Then, they could focus on growth.
The European Central Bank is starting to move. Late last week, it relaxed its quality requirements on assets being pledged as collateral by banks looking for cheap capital. And it's widely believed the ECB will cut its key interest rate (at 1% now) early next month.
These are merely Band-Aids for the deeper structural problems at work in the eurozone crisis. Indeed, ECB chief Mario Draghi said on June 15 that the Continent had reached a point "where political choices have become predominant over monetary instruments that we can use in the near future." Essentially, he is saying that real solutions will require progress toward the United States of Europe.
I'll make this really simple: Unless Germany relaxes its strict austerity-only, no-bank-union, no-liability-sharing approach at this week's summit, things are going to get ugly -- really ugly. So it's all about pleasing German leader Angela Merkel and melting the icy façade that's been the bane of Europe's troubled "Latin Bloc."
Last Friday's "pre-meeting" of the German, French, Italian and Spanish leaders was a bit of a dud, with agreement to a measly $162 billion "growth pact." Europe needs to do more. Germany needs to do more.
Global policymakers are practically begging Germany to interrupt the death spiral of austerity, weak economy, weak banks, deeper deficits and more austerity that it keeps pushing on its European neighbors.
The head of the International Monetary Fund is calling for a banking union with shared deposit insurance, shared supervision and shared failed bank resolution, as well as shared liabilities via "eurobills," short-term bonds backed by the entire eurozone. The Bank of International Settlements over the weekend also threw its weight behind the banking union idea. Even the banking lobby is calling for more cooperation via the Institute of International Finance.
We need a game changer to break us out of the funk. This week's summit may very well feature one.
VIDEO ON MSN MONEY
Seriously....I just don't understand why people don' "get" that socialism does NOT work...?
Is it because they are just flat stupid?
The "takers" will always inevitabley take more than the "givers" can give...it ALWAYS collapses.
It's not rocket science....
Same old story, print more paper money. Devalue everyone's savings, Same solution thats been going on for hundreds of years. German people have had enough inflation.
ICELAND FORCES DEBT FORGIVENESS: TOTAL US MEDIA BLACKOUT
"The government of Iceland has forgiven the mortgage debt for much of its population. This nation chose a very different way of stopping the crisis from the rest of European countries. It decided to hear the requests of the population and to put politicians and bankers on the bench of the accused three years after their financial excesses would sank one of the most prosperous economies in 2008." teleSUR
youtube DOTC0M /watch?v=uyxzg58JkYI
OK Tony, I'm a Euro fiscal genii and I grant your wish. Poof, the EU is like the US with it's FED.
The US used to not be in debt like it is until the FED and socialism came along after the Great Depression. Sure, it was easier back then to "prime the pump" to get things going because the US wasn't in the habit of borrowing 40% of every dollar spent. The government didn't have much in reserve, but it did have the capacity to print money and borrow till the cows came home. Now look at us, we have somewhat limited socialism (according to some) and a mountain of debt with no political will to reduce (lets not kid ourselves about paying this off, ever) the debt. In order to advance the economy more debt must be taken on. Soon the US will not have any money for anything, nothing, just debt. You know this.
Although the US doesn't have the kind of socialism that Europe does, just imagine the amount of debt Europe would rack up if (given their deep ingrained socialist ways) with a FED system to cater to every conceivable entitlement. A FED system would just encourage them to spend even more money than they don't already have.
Your suggestion is shortsighted and reckless.
The world is currently MEANT to suffer through this "recession" because of the mountains of money spent. There IS NO EASY FIX, no poof.
And thanks MSN, for forcing me to choose "send an email when someone replies" so I could even comment. F*U
The Baltic states, Estonia, Latvia, and Lithuania, rejected the socialist answer to any question, namely, borrow and spend--and if that doesn't work, borrow more and spend more. The Baltic states' economies have grown over the course of the European collapse. But for the PIIGS and Obama's United Socialist States of America, government is the answer, ergo, if problems still exist, Government must write more laws, more rules, more regulations, more mandates, and, of course, increase "investments" and the borrowing necessary to effect those "investments".
What a stupidity
United Europe? Is this world completely brainless? There are some factors that are required, of course if you are trying to accomplish it democratically, to unite countries. Some of the prerequisites are;
1. Common territory
2. Common language
3. Common customs
4. Common history
5. Common legal system, etc...
And here comes a bunch of morons running around screaming;’ lets get united, lets get united’. It will never happen. Especially in EUROPE. It is difficult to unite one single state in Europe. Anybody that lives, or lived or is familiar with Europe will confirm that. How big of an idiot one must be to really believe this ridicules and senseless venture
In business we say the majority of the solution of a problem is understanding it. You have written a very interesting article which completely misunderstands the causes of the problem. This debt crises is a bubble caused by public overspending with virtually uncontrolled credit coming from the banks (forced by governments with control over their operations - such as the Bank of Spain) who make a significant profit over the interest rate at which they can borrow (often German banks) and that they can loan money to the public sectory which is paying more than is the private sector.
I can talk directly about Spain, as the country of my residence. Public overspending greatly exceeded income to pay for it under the Socialists, and continues at present. But virtually all money entering into Spanish banks is loaned to the public sector which is also delaying payment or forcing the banks, for the significant amounts to political parties and other "social" representives, to write off and "forgive" the debt. A high level of corruption exists along with a defense of personal interests. And all lower public corporations have received the tacit guarantee from the national government to assume payment of their debt to prevent them from going bankrupt. International lenders no longer believe Spain, nor any other country of the PIIGS, will be able to meet that promise so these countries are attempting Europe (read Germany) to give guarantees to keep the money flowing in. And including the tacit promise to assume the debt for those countries not able to pay such as for Greece. There is a demand, but no teeth to force, spending reductions other than by refusing to provide rescue funds.
Germany is opposed but knows that its banks have much to lose if any country defaults payments, as they already found out for Greece. In Spain the problem is cash flow, caused by too much resources tied up in debts to construction and public corporations who take a long time to pay their debts if at all. And the banks are unwilling to accept the reduction in "shareholder equity" the creation of a provision for this debt would cause. But this provision would not affect the true net value of the bank since no profit or loss would actually occur until the toxic asset were disposed of.
The problem is excess public sector spending coupled with a reducing income. For example the former Spanish president, Rodriguez Zapatero, publicly proclaimed the borrowing of money by Spain at a low interest rate to lend to Greece at a higher rate was excellent business. He supposed that Greece would always be able to repay it. But there is a Greek island where the majority of its taxi drivers are legally blind. How can they repay a if fiscal fraud is normal. Spain is also attempting to convince all that its debt is without risk but virtually all the money going into the banks goes to the public sector where the politicans are using it to buy votes and influence.
You miss the point. Lending is a business decision now being controlled by politicans who couldn't care less about profitablity, or payback. Except for Merkel, who knows the only solution is to spend no more than revenue received. Borrowing should be only to cover the valleys of cash flow, to be paid back during the peaks. She knows that we can no longer give unqualified politican and labor leaders high salaries in public companies or those controlled by politicans like the Spanish savings banks (Bankia for example). We can no longer protect the banks from failure because they are loaning far too much to the public sector, the same as they did to construcion not very long ago.
In Europe only Merkel is on the right track. Governments must reduce spending to less than they are able to obtain from the taxation and other sources of those under their responsibility. And corruption, of all types, must be eliminated with those responsible punished.
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