Doomsdays Loom For Euro, Dollar
July 9, 2012 by Sam Rolley
The European Union is, and has been for some time, in the midst of economic calamity. Matters are only getting worse, and Americans should be worried.
British politician Nigel Farage pointed out last week while speaking to the European Parliament that through 19 economic crises summits, Eurozone leaders have yet to make progress in saving the sinking euro ship.
Farage likened the latest summit to The Rolling Stones’ famous tune “19th Nervous Breakdown.”
The British lawmaker contends that the European Union has proven insoluble and suggests that its separate member nations leave the Eurozone, go back to original currencies and “get back their democracy and identity.”
But that isn’t likely to happen.
At the latest — “19th Euro Breakdown” — summit last month, European leaders moved to halt the economic crises that have taken hold in Spain and Italy by agreeing to a radical bailout package. As a part of the package, Eurozone leaders have committed to European Central Bank-led oversight for banks, hence allowing a rescue fund — the European Stability Mechanism (ESM) — to recapitalize banks directly. Traditionally, the taxpayer-provided bailout funds would have been lent to governments.
The leaders of the 17 Eurozone countries are expected to meet today to clarify bailout details, but say it will be months before they finalize the plan.
Farage said in a recent interview that the plan essentially creates a European debt union controlled by the economically solvent Germany. He predicts that political disagreement about allowing one European country to gain too much control will hamper any European bailout efforts and posits European leaders’ efforts to “kick the can down the road” and prolong the European economic collapse will ultimately fail as financial markets force a collapse.
As the United States is facing its own economic difficulties, a Eurozone collapse would have definite negative financial implications stateside. Longstanding economic cooperation between the European Union and the United States has led to a healthy trade relationship that would likely collapse along with the euro. The result will be higher consumer prices on some goods for Americans.
Actions that may be taken to aid the Eurozone by the International Monetary Fund should also raise concerns with Americans. Because of the United States’ involvement in the IMF — contributing about 18 percent of the IMF’s funding via American taxpayers — any attempt by the fund to rescue a collapsing euro would come in part from Americans’ pockets despite the fact that the IMF has no direct accountability to the American populace.
Another problem the U.S. economy faces in the event of a euro collapse is the Federal Reserve’s willingness to engage in the same tactics that have failed Europe to attempt to stimulate the economy both at home and globally. The Fed already moved last month to continue “Operation Twist” — a program designed to lower long-term interest rates in an effort to promote borrowing — until the end of the year, and is prepared to further intervene in markets if the euro fails.
“We are hoping for the best … but we are prepared in case things get worse to protect the U.S. economy and the U.S. financial system,” Fed Chairman Ben Bernanke told reporters last month.
Bernanke’s preparations include the prospect of another round of quantitative easing (money printing), which could lead to massive dollar devaluation if Fed policy fails.