Why Europe struggles as U.S. rebounds

[J]

Would that be the European Stability Mechanism which you're referring to?

[Thanas]

I am not sure how it is called in English, might be it. Basically, I am talking about the plan for the EU to take over for contries in trouble and if necessary, sidestep the government and even start controlled insolvency proceedings.

[J]

That sounds like the one. It's supposed to replace the current EFSF and European Financial Stability Mechanism in handling issues relating to sovereign debt. I believe it's slated to go into effect in the middle of 2013.

[Thanas]

Yeah, I am pretty sure that is the one as well, come to think of it. Pushed through unilaterally by Merkel and Sarkozy, I believe.

[Prannon]

I am not sure how it is called in English, might be it. Basically, I am talking about the plan for the EU to take over for contries in trouble and if necessary, sidestep the government and even start controlled insolvency proceedings.

Not exactly on the topic of US and EU economics, but I know that the EU is anything but a monolithic, state-like, political block. People were keen to point that out when we were doing our studies back in university. However, that sounds like an unprecedented level of control for even a proto-state like the EU to exert over one of its members. Unless I'm misinterpreting the implications of "take over for contries in trouble" and "sidestep the government," how did Merkel or Sarkozy ever manage to get that integrated into EU processes without every other member crying about loss of sovereignty?

[Thanas]

Germany did it by simply saying that it would otherwise not pay for bailouts anymore. The reason for that was that some member states would like to turn Europe into a sort of wealth transfer machine, with Germany paying and the others receiving money. So Merkel simply said she would not do so.

Of course, no other nation liked to call that bluff. Would you feel comfortable bluffing with Merkel?

[Prannon]

Putting it that way, it makes perfect sense. And no, I wouldn't want to play chicken with Merkel. Or Sarkozy for that matter. Thanks!

[Zaune]

It will also presumably cover a wide spectrum of disaster scenarios, and I imagine the direct intervention powers will only be available under more extreme conditions. And frankly, it would be negligent in the extreme for the European Union to not have a contingency plan for preventing one of its member nations from becoming a failed state.

[K. A. Pital]

Taking over and controlling a state means it has failed on it's own anyway.

[Thanas]

Taking over and controlling a state means it has failed on it's own anyway.

I'd disagree. The definition of a failed state does not mean "threatening bankruptcy", it means that a lot more institutions have failed, like the police, the justice system etc.

[K. A. Pital]

Quite so. But in this case a default of a nation is a sovereign matter, in my view.

[Thanas]

I would agree in principle. However, every nation already surrendered that part of their sovereignty when forming the EU, and when getting EU subsidies etc. The EU clearly was not intended as a "Germany gives free handouts and nations can just do what they want" concept. For better or worse, when they joined they agreed to be linked.

[Skgoa]

While I am in favor of the EU being a mechanism to help the fringes of its territory catch up in priciple, these countries have brought it onto themselves by borrowing at rates and in amounts they just couldn't pay back, ever. I actually lived in Greece for seven years and got to watch its transition from a third world shithole to what could at first glance pass for a civilized country at the start and in the first halve of the decade... but this wonderful developement was bought with borrowed money. Literally, people borrowed money (i.e. used credit cards) to buy all those things the people on TV have. And when everyone had a new car, a new TV and a new fridge... the economy wasn't any better, but now it had to carry the additional burden of massive debt.
Anecdote: It got so bad that car companies started to put leather interiors etc. into all cars and Toyota had thousands of 'unsellable' cars just gathering dust for more than a year... and that was BEFORE the global recession.

edit: Oh and if you think its just a matter of doing a few little corrective policy changes: when the recession hit the already troubled greek economy in 08, it got so bad that you could literally watch shops along the streets close one after the other on a daily basis. The "PIGS" are fucked to such an extend, its just mind boggling. Lets hope Spain somehow manages to get a significant portion of its "lost generation" employed, or we europeans are going to have fun times.

[Fire Fly]

So the big news currently is that it appears the US is ready to help bail out the EU through the IMF. Link

US Ready to Back Bigger EU Stability Fund: Official

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday.

"There are a lot of people talking about that. I think the European Commission has talked about that," said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. "It is up to the Europeans. We will certainly support using the IMF in these circumstances."

"There are obviously some severe market problems," said the official, speaking on condition of anonymity. "In May, it was Greece. This is Ireland and Portugal. If there is contagion that's a huge problem for the global economy."

The remarks foreshadow a visit to Europe this week by a U.S. Treasury envoy who is expected to visit Berlin, Madrid and Paris to hold talks on the ramifications of the debt crisis.

The developments have echoes of the pressure applied by Washington on European capitals last May to create the near $1 trillion EFSF safety net that was last week used to rescue Ireland after its banking crisis spiraled out of control.

The IMF, whose biggest single shareholder is the United States, has committed 250 billion euros to the EFSF.

While reluctant to dictate to Europe how it should address the unfolding debt crisis, the U.S. government is growing concerned about the global fallout of Europe's predicament.

U.S. Treasurys' prices fell and the euro strengthened against the dollar on Wednesday after the news that the United States would be prepared to support an enlarged EFSF.

Germany, whose leaders have expressed frustration at the market backlash against their plans to solve the euro zone's debt problems, does not want to make the stability fund larger.

And Euro/USD also just sky rocketed.



My knowledge of economics is limited but I presume that while this is politically unsavory, it's necessary in the long run to prevent the EU from dragging down US recovery? Or...?

[Thanas]

This is actually a smart move by the US. By boosting the value of the Euro, they help their own trade deficit. And by getting the IMF involved, they gain a certain amount of control over what was supposed to be a EU-only fund. So, very smart move here by the USA, especially as the EU is hardly in a position to refuse the help.

[J]

US banks have a PIGS exposure problem.

bloomberg link

Excerpt

JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy, Ireland, Greece and Spain, according to Wells Fargo & Co.

U.S. banks held a total of $236.8 billion of exposure to the five nations, including $18.1 billion to Greece, Wells Fargo said.

That's the main reason behind the US conducting indirect bailouts in Europe. The rest is icing on the cake.