Now it's Europe's turn, but there's no joy in the US

Business Times - 13 May 2010

Now it's Europe's turn, but there's no joy in the US


IN THE aftermath of the collapse of Lehman Brothers and the ensuing meltdown on Wall Street, some Europeans took a certain pleasure over the economic mess across the Atlantic.

French commentators suggested that the US financial crisis highlighted once again the structural flaws and the moral failings of the Anglo-Saxon economic system (as opposed to the more statist version practised in France). The Germans contrasted their more conservative social market model with the free market principles guiding policymakers in Washington.

And the European Union's technocrats were more than willing to dispense constructive advice to their colleagues in Washington while expressing initial (and very brief) sense of confidence that the growing troubles facing the US economy were not going to spill over into Europe.

In fact, some analysts predicted that the US economic crisis, coupled with the military fiasco in Iraq, had exposed the long-term political and economic problems that were eroding the foundations of the American 'hyper-power' and provided an opportunity for the EU to project its power globally. After all, the value of the euro was gaining strength over a feeble US dollar.

That was then. Now after the Greek crisis has helped expose the deep-rooted structural weakness of the EU while destabilising the euro and threatening another global market meltdown - just when the American economy seems to be entering into a process of slow recovery - very few American policymakers and commentators are expressing any satisfaction over the plight of their allies across the Atlantic, recalling the dark days of 2008.

If anything, the economic crisis in Europe, like the other events of the past three years, has demonstrated that economic problems in one area of the world cannot be contained and that financial contagion is real and could become quite devastating. Hence, what started as a relatively small problem in US sub-prime mortgages quickly spread out to the whole world and ignited major global recession. And now in mirror image of the broader economic effects of the collapsed sub-prime market, the tiny economy of Greece is having an impact on the US economy.

That explains why the Obama administration and the US Federal Reserve joined the European governments and central banks early in the week in making concerted announcements aimed at calming the global markets. In practical terms, the US participation in an international bailout of Greece means that American taxpayers will be helping to bail out Greece as part of an effort to restore stability to the global economy.

White House officials told reporters in Washington that President Obama had spoken to both German Chancellor Angela Merkel and French President Nicolas Sarkozy and discussed with them the importance of the members of the European Union taking 'resolute' steps to build confidence in the markets and ensure that the debt crisis in Greece would not overflow into the economies of southern Europe, threaten the entire euro zone, and then destabilise the global economy.

The implication was that Mr Obama and other top US officials (including Vice-President Joe Biden who was visiting Spain) were pressing the Europeans to embrace the kind of 'awe and shock' approach pursued by the White House and the Fed after the collapse of Lehman Brothers.

From that perspective, the EU's economic stabilisation agreement that comes to about US$1 trillion has been compared to the US bailout of the banking system, a European version of Tarp (Troubled Asset Relief Program).

Where the analogy breaks down is that unlike the US, the EU consists of separate nation-states and lacks a federal economic-policy apparatus backed by a central government and a unified political system. That is why the European leaders had faced so many obstacles to reaching a deal on the rescue package. And while the EU may have bought some time now, it is not clear whether the 27 members would succeed in creating a more cohesive political system that is necessary in order to support the euro. In fact, it is not inconceivable that the euro zone could break up if the EU fails to resolve the debt crisis.

The main reason for scepticism here is the markets are beginning to question if governments in Europe with their enormous debt obligations will be able to carry the burden of bailing out Greece and other problem economies.

And indeed, the spectre of a global sovereign debt crisis, including rising US government debt, has been raising the concern that more government-led bailouts coupled with rising fiscal spending - the Congressional Budget Office predicted that America's debt held by the public will reach 90 per cent of GDP within 10 years - could mean that America would be experiencing its own version of Greek tragedy in the not-so-distant future.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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