The European Muddle

Like many great issues of the day, the euro mess is difficult to conceptualize.  Why not take a stab at it, though, since it’s something that could cause the US economy to collapse?

Here are links to a few graphics encapsulating different aspects of the European problem.  A few insights can be gained by interpreting them with our own 2008 financial crisis as a point of comparison.

The European Union faces at least two complex interrelated problems.  The first has to do with the condition of banks; the second has to do with the indebtedness of member countries.  There is also a third problem, which is more political.  It has to do with the structure of the EU itself and the poor tools it has for redressing “state-level” problems (critical weaknesses within member-nations like Greece and Spain) that threaten the euro’s value and stability.

Credit imbalances within the euro zone
The integration of nations within the eurozone encouraged capital flows within the community, while creating imbalances that threaten it, should the banks within one of the weaker countries fail.

This wonderful set of graphs published by the New York Times shows the interrelation among creditors and borrowers by country.  Done in late 2011, the graphs offer a general idea of how the stronger European economies—France’s in particular—would be affected if the banks of Greece and Italy were to go down.  French banks have many loans outstanding there and would incur grave losses, possibly fatal ones, were their weaker counterparts to fold.

Unlike in the US, the euro-zone lacks a mechanism like the Federal Reserve, which capably intervenes to stabilize and close or sell ailing US banks if necessary.  In 2008, the Treasury and Federal Reserve averted a general financial meltdown in the US this way.  They intervened directly in the affairs of troubled banks in the interest of keeping the whole banking system operating.  The panic of failing banks was mitigated;  otherwise, it would have spread like a contagion.  Our banking system was supported, and the problem was treated as a matter quite separate from that of the federal government’s own indebtedness or patterns of borrowing.

Until recently, the European Union could not behave similarly: it could not act to help banks, it could only give money to sovereignties.  On June 28th, however, the EU’s member-nations agreed to begin lending money to banks directly, a measure that untethers these two problems and allows a more flexible approach aimed specifically helping banks that might fail.  Nonetheless, it remains to be seen whether this will be much help, as the level of capital needed to stabilize the banks is very large.

Rising sovereign debt
Which leaves the other big problem: the rampant government spending in many EU countries, illustrated in this set of maps, also published by the New York Times.  The maps indicate the significant variation in the spending habits of the governments that make up the European Union.  In many of the EU countries, however, including some of the strongest—such as France and Germany—sovereign debt as a portion of GDP has been growing dramatically.  The difficulty of reining in spending and bringing the most profligate governments in line has led to popular unrest as well as political conflict over austerity measures and proposals for stringent fiscal reform.

It’s not clear, though, whether these disproportionately high debt burdens pose a threat to the long-term health of many of the stronger EU countries.  The more that the elements of the crisis can be differentiated and handled pragmatically on a case-by-case basis, the better the prospects for amelioration will be.  This is definitely a case where what’s good for the goose is NOT good for the gander–or in this case, more fitly, for the PIIGS (the acronym for Portugal, Italy, Ireland, Greece, and Spain).  Helping the most distressed banks may at least buy the EU time to address the more politically fractious issue of how to restore fiscal balance—a very different proposition in Greece than it is in France or Germany, and a more sensitive issue still for the euro zone as a whole.

The Sovereign Debt Exposure of the EU’s 10 Strongest Banks
, Forbes.
Paul Taylor, Euro Zone Fragmenting Faster Than the EU Can Act, The Independent (Dublin).

How the Fed Makes Us Lazy—and What We Can Do
This is not a post about hating the Fed and how we should get rid of it.  This is a post about the rest of us and how convenient it is to have the Fed to complain of.

I was tempted to title this post, “The rabble are out to crucify Ben—there’s even a Judas” (now that Paul Krugman, the Fed chief’s former Princeton colleague, has taken to assailing Benanke’s performance in print).  But that would have been just one more example of the phenomenon I’m out to criticize: finger-pointing.

It would be tough to judge a finger-pointing contest these days.  As the economy flails in the long wake of the financial crisis, everyone in every party seems to be training to become a finger-pointing champion.  What interests me about the attacks on the Fed, however, is that even anti-government types now seem caught up in thinking that tinkering with the government is the key to solving problems that—let’s face it—the American private sector created.

The federal government is powerful, but more powerful still are the aggregated interests that pump out more than $15 trillion worth of goods and services a year.  That was our GDP in 2011, a CIA Factbook figure.  If you hold a job, work in a profession, run a multinational, or own a small business, you are part of that great engine.  Simply put: we are the economy.  The mess is ours.

Perhaps this is why we feel such scorn for Ben Bernanke, a man so sincere and conscientious it’s irritating.  Love him or hate him, it’s hard to claim he isn’t doing his utmost to fulfill the Federal Reserve’s dual mandate, which is to stabilize prices AND move the country toward full employment.

That’s right: one soul at the helm of the Federal Reserve, believes that, by controlling the amount of money in circulation, he can sufficiently influence the sort of corporate decision-making needed to end joblessness.  He hopes that, by tweaking our monetary policy, he can prompt our American brothers to give another American brother a job, until every brother and sister in our economy is once again working.

This is why, in Mr Bernanke’s increasingly frequent public appearances and statements, he can be heard fretting about, say, whether long-term unemployment could lead to a permanent loss of human capital in the economy.  He truly believes that getting all of America back to work is his responsibility.

He may be the only American who feels that, unfortunately.  This is why hating the Fed is so misguided and self-deceiving.  Hating the Fed is a cop-out, a lazy habit that absolves the rest of us from looking around us and asking who else might bear some responsibility.  Our national preoccupation with monetary policy is a convenient dodge, diverting us from the fact that we ourselves could do something.

We are the economy.  Regardless of the shortcomings of the Fed and Mr Bernanke, we owe it to the jobless to recognize their lot as a social, civic, and humanitarian problem, one that’s in our power as a society to remedy.

Should we destroy the one thing that’s working?
Obviously not.  The Fed would matter a lot less if we could manage to get some other things working as well as it does.  If we didn’t have institutions like the Fed, it would be up to Americans in their respective states and communities to figure out how to alleviate joblessness and destitution and restore prosperity.

This was our lot earlier in our history, when Americans operated with a mere fraction of what now passes for economic understanding.  In those times, punishing downturns such as those occurring in 1837, 1873, and 1893, led not only to protracted suffering but also to constructive cultural and social ferment, an outpouring of philanthropic zeal, and more than a little genuine soul-searching.

The Panic of 1837, for instance, prompted the formation of some of our earliest urban relief organizations, while the banking crisis of 1856 gave way to a religious reawakening in 1857 known as “the Businessmen’s Revival.”  Chief among the converts were Manhattanites who concluded their own godlessness and greed were to blame for the economic adversity they were suffering.  Such heartfelt contrition and public avowal of responsibility, even in secular form, have been all but missing from our present-day financial crisis.

We can’t hope to lessen joblessness if we don’t recognize our obligations to one another.  We can’t hope for national prosperity when so many of our fellow Americans are jobless and poor.  The common-sense idea that we must care for one another, even if only for selfish reasons, is crucial if we are to re-energize our economy.  It might not be an idea Ben Bernanke can teach us, but it sure is one that we can use.

Want help  •  Foreswear laissez-faire  •  Use all the tools
Hire a fellow American  •  Talk to the rich guy

Susan Barsy, Fiscal Policy is not Economic Policy, Our Polity.
Dean Baker and Kevin Hassett, The Human Disaster of Unemployment, New York Times.
Rick Newman, To Fix the Federal Reserve, Fix Congress First, US News.
George F. Will, The Trap of the Federal Reserve’s Dual Mandate, Washington Post.
Ken McLean, The Fed’s Dual Mandate Dates to a 1946 Act, Washington Post.

Image: Official portrait of Federal Reserve chair Ben Bernanke, from this source.