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
Notably, the prediction that bad news would lead today's markets was exact. They will play all day but finish down 125 points so there is a net gain after 2 days of artificial pumping. All that cash could be recovering us.
@ J R Brown
You could just go blathering on with your right wing prattle about how "socialism" doesn't work. In fact, some of the countries of Europe and the world with a tradition of democratic-socialistic governments have among the highest standards of living in the world. Higher than the United States.
You could Google it and find that out. There are even a couple of excellent Wikipedia articles on the subject. You could go to continental Europe and see the dynamic economies that democratic-socialism has produced. But that would involve actually studing facts, rather than just spouting right wing idiology. Right wing crazies never deal in actual facts.
Just as bad as the metric conversion in the U.S? Oh, yes, the supposed transition period is the consolation? Really? Something's are better off left alone to be what they are as far as the end result? The effects are not worth the aggravation of the transition to most people. Too bad some tinkering fidgeting people just can't leave well enough alone? Wouldn't it have been nice if someone had asked the average person off the street before implementing such a drastic move? But, the average person doesn't really know what's best for them or don't care is the typical reply? They vote don't they? It's about time they were really consulted on important issues that concern them isn't it? In this day and age of communication, there's not much excuse for not asking people first is there instead of just assuming?
.For example: As for the many problems the Euro currency solves it also creates others. Like for instance the simple chatter I've heard that some people favor one type of Euro from one country, over another because they're supposedly not as stable or able to back up it's currency as well? True or not, that's what some people believe. It is what it is? Small and sort of trivial, but some things start small and escalate into larger issues no matter whether if they're true or not?
Another thing, Germany basically absorbed much after the Berlin Wall fell and did very well. Including absorbing many refuges from other countries. Very commendable. And, far better than what the U.S. has done in that direction too. So what if Germany isn't as large as the U.S. th U.S. has more revenue, land and other resources at their disposal. But, should Germany continue to bolster other countries economically for whatever reason and sometimes unfairly? What if they simply get tired of it and decide to quit? They've been very good natured about it so far, but I've heard some buzzing about the concern over the years that the situation is taxing the German people in general way too much and they're getting very tired of it too. It's not just about the money involved, it's also about other things too. Like their customs. So, what's the result of that? More welfare states depending on Germany for their economy because they couldn't think their way out of a financial problem by themselves very well?
Language barriers in Europe? They do exist, but aren't usually as widespread or as serious as in the U.S. Still, simple meanings do get misconstrued into possibly meaning something else making things not always so simple after all? What's next on this warped agenda? A one world language? That'll fly really well when most can't even completely speak their own native tongue all that well now?
This one world order thing makes a lot of people very nervous from past history and experience with it. And, for the most part, it's very understandable. At least to me. A U.S. of Europe is basically another foot into the doorway of that grave direction? From everyday people I've talked to from all over the place, in the U.S. and other countries, on the one world thing, economically or otherwise, it makes them uneasy and not very comfortable because they feel like they're losing more than they're possibly gaining.. Some out of touch people may visualize it, but for the most part the average person doesn't. So, where does that leave all of the rest of us or the leaders who push and believe the medicine show con job at for when the people who support them really don't? Real economics isn't just about money is it? It's more about what's done with it by who and why?
I suppose the Germans have in mind to accomplish what A.H. could not do back in 1941.
Not even the smallest, postage-stamp country will be willing to give up its soveregnity to the Germans...
Another problems are the language issue, and the Muslim inmigration.
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
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.
What?????? He's talking about Europe being a UNITED Union, NOT having them be a part of the USA. Sheesh.
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....
If you have seventeen counties that can agree to neither a monetary nor a fiscal policy, then how do you expect to attach these Euro-countries to the United States of America, which is currently made up of fifty independent states. I say "currently" because at present, responsible leadership is non-existent here in America, debt is running over 100-percent of what is being brought in, fully one-quarter of our working labor force is permanantly unemployed, 45-million of Americans are on food stamps, as many of our children participate in the school lunch program, one applicant is competing with six other applicants for every job that opens up, one out of every two college graduates is either under-employed or unemployed.
And you want to join Europe with the United States of America. Ever hear of the fate regarding the Tower of Babel? And you want to add seventeen different cultures and national identities to a group of people that already hate each other's guts. Most Americans cannot stand other Americans, and you want to add all these other countries that most of our ancestors escaped from by emigrating here to begin with?
America is a fading empire (about to collapse), attached to a special relationship with another country (Great Britian), who refuses to give up the last delusions of its own status as a deceased empire, and you want to mix in the "old world" with the "new"?
Goof luck with that.
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