THE EU IN CRISIS: A SINKING SHIP BEYOND RESCUE?
In private sideline conversations between principals during the G-8 summit meeting at Camp David, some significant decisions were made that will impact the long-term fate of the European Union over the coming weeks and months.
Those conversations centered on the decision to plunge ahead with the bailout of the European banks in an effort to save the Euro system, with Greece still inside. The prime influencers behind this decision were Managing Director of the International Monetary Fund Christine Lagarde and President Obama. Both Lagarde and Obama are concerned that if Greece leaves the Euro, the contagion will spread to Spain, Portugal, Ireland, and, perhaps, even Italy. President Obama’s unspoken motivation in preventing a financial meltdown of the Euro system is the possibility that it would almost certainly spill over into Wall Street and adversely affect the U.S. economy.
Christine Lagarde put the IMF squarely behind a bailout of the European banks, with the full backing of the U.S. Federal Reserve and Treasury to boost the leveraged lending of the European Central Bank (ECB) to prop up the European banks. The ECB will likely take junk bonds and other vastly over-priced assets as collateral for loans to the Spanish, Greek and other European banks—a move that will offset an additional estimated $500 billion in new writeoffs by bondholders of Greek debt.
So, the IMF, the Obama Administration and the ECB appear to have colluded to further delay the reality of the financial and banking crisis through what are--by any measure--very risky, hyperinflationary measures. From the Obama Administration’s perspective, however, the strategy will have succeeded as the crisis is effectively postponed, taking many months to fully play out (versus days or weeks), well past the November elections in the United States.
In his sideline meeting with new French President Francois Hollande, President Obama reached a full agreement on this perpetuation of the Euro. This is an area where Hollande and German Chancellor Angela Merkel will agree to disagree. They both want to defend the Euro, but Hollande will continue to insist that austerity must be limited and a growth program initiated. While the feasibility of such a dual-track program is questionable at best, it is nonetheless the growing agenda of the Euro-socialists, including Hollande, Germany’s Social Democratic Party and the Italian Socialist Party. A majority of Greek voters are in favor of staying in the Euro, so long as the austerity is reduced.
Hollande will make continued efforts to push for Euro bonds as one way to implement this bailout plan. Merkel will continue to oppose and block the Euro bond argument. Merkel recently told her party that “under no circumstances” would she agree to a Euro bond strategy.
“A Euro bond would take a few years to implement because there are lots of technical issues to solve and also implementation of the Euro bond procedure would take several years,” Finnish Prime Minister Jyrki Katainen says. “So Euro bond[s] are not a solution for this current crisis,”
The total amount of assets on the books of the US Federal Reserve and the European Central Bank, combined, fall well short of the currently estimated 4 trillion Euro liability of the European private banks—something that U.S. Treasury Secretary Timothy F. Geithner is acutely aware of.
Treasury said, in a written statement, that Katainen and Geithner recently met and “discussed the global economy, including the United States’ economic recovery and the plans of European leaders to reinforce the institutions of the Euro area.” Federal Reserve Chairman Ben Bernanke, conspicuously absent from the Treasury statement, also was also present and participated in the same discussions.
Both Bernanke and Geithner are said to be extremely worried about the worsening trajectory of the Euro crisis. While they know they are in a position to delay a breakup of the EU, they may well be powerless to prevent it if the downward spiral continues unabated. Geithner’s message has been a clarion call to EU leaders to address their core problems now, not later. With unemployment at depression era levels, and the periphery of the EU experiencing zero growth, the massive deficits of countries like Greece, Italy and Portugal are simply too large to bail out, even with U.S. help.
So, while EU politicians sit on their deck chairs, discussing ways to achieve deeper integration in the 17-nation euro area, Germany, Austria, and the Netherlands are privately donning life vests, preparing for the EU ship to sink in cold, unchartered waters.
When that happens, the well-practiced S.O.S. call will go out to U.S. rescue ships in the area, as always, only to find out that they’ve run out of gas.★