pkpatriotic
SENIOR MEMBER
- Joined
- Apr 2, 2008
- Messages
- 2,317
- Reaction score
- 0
Why Europe will take longer than U.S. to bounce back
By David Marsh
Caricature of disunity
Commentary: European Union is ill-equipped to tackle U.S. crisis
LONDON (MarketWatch) -- "The dollar may be our currency, but it's your problem." Europeans remember with a shudder the jibe used by John Connally, President Richard Nixon's free-speaking Treasury secretary.
This was when the Americans sent another shock wave through the world -- maybe small beer compared with today, but it seemed like a big thing at the time -- by abandoning the dollar's link to gold in 1971.
Quite a landmark: the beginning of the break-up of the post-war Bretton Woods system of fixed exchange rates. Henry Paulson, Treasury secretary 37 years later under another beleaguered Republican president, is more polite in his dealings with the Europeans (that is, when he cares to take note of their existence). But fundamentally his message is the same: "Our crisis, your problem."
From Greece to Ireland, signs abound that the old economic rigidity is still present.
American financial upheaval is now washing over with full force on to the shores of the Old Continent. The rescue operations for European banks -- from the U.K. to Greece, from Ireland to Germany and Belgium -- underline the scope of the disorder. Assuming Armageddon is averted and some sort of recovery starts in the U.S. next year, Europe will probably take longer than America to emerge from its trough -- reflecting innate economic flexibility in the U.S. economy and the rigidities still present in Europe.
There are some colossal ironies here. In particular they surround the setting up of Economic and Monetary Union 10 years ago, now linking 15 countries including all the important European economies except Britain and Sweden.
An important motive behind the creation of the single currency was to fulfill a vision first put forward nearly half a century ago: to lower Europe's economic dependence on those craven, myopic, ill-starred and selfish Americans running craven, myopic, ill-starred and selfish fiscal and monetary policies.
More exposed
Great idea. And what has happened in the meantime? Because of the multitude of connections on globalized markets, interactions between the U.S. and Europe have multiplied. Far from being cut off from developments in America by the magic curtain of the euro, Europe is more exposed to U.S. than in the past.
At no other time in the past half century have we seen greater truth in the old adage, "When America sneezes, Europe catches a cold."
But surely the Europeans have risen to the challenges with a consummate display of unity. Isn't that what European Union is all about? You could be excused for thinking that Europe, with an intact monetary policy edifice such as EMU, would be in a better position to withstand crises with a show of solidarity and common policies. You would think it's better equipped to repair immediate economic damage and enact longer-term changes in regulation and banking control.
You would be wrong. In fact, in response to the turbulence, Europe seems to be doing its best to serve up a caricature of disunity.
Throwback policies
The best example has been the response by the Irish government -- almost immediately copied by the Greeks -- to bring in state guarantees for all deposits at the country's top six banks. The move is certainly desperate, probably counter-productive and possibly extremely costly. Such measures, taken without any consultation with the other Europeans, are a throwback to beggar-thy-neighbor polices, which have no place in a cohesive grouping of economically advanced states.
But on Sunday, in response to worsening ravages at Germany's second-biggest mortgage lender Hypo Real Estate, the Berlin government went one better and offered state guarantees for savings deposits worth around Euro 560 billion -- roughly one quarter of German GDP (or equivalent to the combined GDPs of Belgium and Austria).
There is a reason for this, of course. Within the EMU, money is under supranational control. Governments can no longer bale out lackluster economies through currency devaluations or interest-rate cuts. But, reaching beyond policies that are within the purview of the European Central Bank, they can still call upon a broad range of further-going fiscal and regulatory instruments in the best European spirit of "every man for himself."
The main reason for the parlous state of Irish banks is that, during a bubble-like boom especially in real estate, they lent too much money to individuals and companies benefiting from the sharp fall in Irish interest rates when EMU started in 1999. Since that time, Ireland's economy has performed very well -- but not well enough, it seems to build up sufficient resources and reserves to save the day when upswing turns into downturn.
So Dublin, no longer having the tools of devaluation or interest rate reductions at its disposal, turns to basically protectionist measures to try to resolve an intractable economic problem. Especially now that the Irish have been followed by the German heavyweight, other countries will follow suit.
Of course, under the unlikely leadership of President Nicolas Sarkozy of France, who holds the half-year presidency of the European Union, some may think unity will suddenly break out across Europe. Dream on.
The four-nation summit in Paris hosted by Sarkozy on Saturday more or less gave carte blanche to the Europeans to do their own thing. The Irish episode marks a new and inglorious tilt to go-it-alone-ism taking hold in a not-so-united Europe.
David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.
By David Marsh
Caricature of disunity
Commentary: European Union is ill-equipped to tackle U.S. crisis
LONDON (MarketWatch) -- "The dollar may be our currency, but it's your problem." Europeans remember with a shudder the jibe used by John Connally, President Richard Nixon's free-speaking Treasury secretary.
This was when the Americans sent another shock wave through the world -- maybe small beer compared with today, but it seemed like a big thing at the time -- by abandoning the dollar's link to gold in 1971.
Quite a landmark: the beginning of the break-up of the post-war Bretton Woods system of fixed exchange rates. Henry Paulson, Treasury secretary 37 years later under another beleaguered Republican president, is more polite in his dealings with the Europeans (that is, when he cares to take note of their existence). But fundamentally his message is the same: "Our crisis, your problem."
From Greece to Ireland, signs abound that the old economic rigidity is still present.
American financial upheaval is now washing over with full force on to the shores of the Old Continent. The rescue operations for European banks -- from the U.K. to Greece, from Ireland to Germany and Belgium -- underline the scope of the disorder. Assuming Armageddon is averted and some sort of recovery starts in the U.S. next year, Europe will probably take longer than America to emerge from its trough -- reflecting innate economic flexibility in the U.S. economy and the rigidities still present in Europe.
There are some colossal ironies here. In particular they surround the setting up of Economic and Monetary Union 10 years ago, now linking 15 countries including all the important European economies except Britain and Sweden.
An important motive behind the creation of the single currency was to fulfill a vision first put forward nearly half a century ago: to lower Europe's economic dependence on those craven, myopic, ill-starred and selfish Americans running craven, myopic, ill-starred and selfish fiscal and monetary policies.
More exposed
Great idea. And what has happened in the meantime? Because of the multitude of connections on globalized markets, interactions between the U.S. and Europe have multiplied. Far from being cut off from developments in America by the magic curtain of the euro, Europe is more exposed to U.S. than in the past.
At no other time in the past half century have we seen greater truth in the old adage, "When America sneezes, Europe catches a cold."
But surely the Europeans have risen to the challenges with a consummate display of unity. Isn't that what European Union is all about? You could be excused for thinking that Europe, with an intact monetary policy edifice such as EMU, would be in a better position to withstand crises with a show of solidarity and common policies. You would think it's better equipped to repair immediate economic damage and enact longer-term changes in regulation and banking control.
You would be wrong. In fact, in response to the turbulence, Europe seems to be doing its best to serve up a caricature of disunity.
Throwback policies
The best example has been the response by the Irish government -- almost immediately copied by the Greeks -- to bring in state guarantees for all deposits at the country's top six banks. The move is certainly desperate, probably counter-productive and possibly extremely costly. Such measures, taken without any consultation with the other Europeans, are a throwback to beggar-thy-neighbor polices, which have no place in a cohesive grouping of economically advanced states.
But on Sunday, in response to worsening ravages at Germany's second-biggest mortgage lender Hypo Real Estate, the Berlin government went one better and offered state guarantees for savings deposits worth around Euro 560 billion -- roughly one quarter of German GDP (or equivalent to the combined GDPs of Belgium and Austria).
There is a reason for this, of course. Within the EMU, money is under supranational control. Governments can no longer bale out lackluster economies through currency devaluations or interest-rate cuts. But, reaching beyond policies that are within the purview of the European Central Bank, they can still call upon a broad range of further-going fiscal and regulatory instruments in the best European spirit of "every man for himself."
The main reason for the parlous state of Irish banks is that, during a bubble-like boom especially in real estate, they lent too much money to individuals and companies benefiting from the sharp fall in Irish interest rates when EMU started in 1999. Since that time, Ireland's economy has performed very well -- but not well enough, it seems to build up sufficient resources and reserves to save the day when upswing turns into downturn.
So Dublin, no longer having the tools of devaluation or interest rate reductions at its disposal, turns to basically protectionist measures to try to resolve an intractable economic problem. Especially now that the Irish have been followed by the German heavyweight, other countries will follow suit.
Of course, under the unlikely leadership of President Nicolas Sarkozy of France, who holds the half-year presidency of the European Union, some may think unity will suddenly break out across Europe. Dream on.
The four-nation summit in Paris hosted by Sarkozy on Saturday more or less gave carte blanche to the Europeans to do their own thing. The Irish episode marks a new and inglorious tilt to go-it-alone-ism taking hold in a not-so-united Europe.
David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.
