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Two To Three Weeks To Prevent A Meltdown In Europe?

That’s what Robert Shapiro, an advisor to the IMF, Harvard PhD., and former Undersecretary of Commerce is saying:

In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone’s mind: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008…. What we don’t know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems.”

But no, Morgan Stanley does, or so they swear an unlimited number of times each day. And they say not to worry about anything because, you see, it is not like they have any upside in telling anyone the truth. Which is why for everyone hung up on the latest rumor of a plan about a plan about a plan spread by a newspaper whose very viability is tied in with that of the banks that pay for its advertising revenue, we have one thing to ask: “show us the actual plan please.” Because it is easy to say “recapitalize” this, and “bad bank” that. In practice, it is next to impossible. So yes, ladies and gentlemen, enjoy this brief relief rally driven by the fact that China is offline for the week and that the persistent source of overnight selling on Chinese “hard/crash landing” concerns has been gone simply due to an extended national holiday. Well, that holiday is coming to an end.

Here’s the video of the interview with Shapiro:

I haven’t been writing about the Eurozone Crisis mostly because it’s been hard for my to wrap my brain around exactly what’s going on here, and a lot of that has to do with the fact that nobody seems to be doing anything other than pretending that they are working on a plan, even though that plan never seems to get implemented. It is, as The Washington Post describes it, a game of chicken:

Efforts to resolve Europe’s debt crisis are, at their core, an exceptionally high-stakes game of chicken, pitting the continent’s central bank against its national governments. Hanging in the balance: the entire world economy.

If an economic calamity is to be avoided, some Europe-wide entity probably will need to funnel money to Greece and other troubled nations and jointly guarantee the debts of the continent’s governments in a we’re-all-in-this-together show of solidarity. The great debate in Europe right now is over what entity will be stuck holding the bag.

The European Central Bank, the Frankfurt-based equivalent of the Federal Reserve in the United States, has the authority to print euros, can make cash available to banks and is led by a small board of highly trained financial experts who can make decisions on a moment’s notice.

In other words, the ECB has the tools and ability to take the kind of dramatic actions that could address the crisis. But doing so could undermine its position as an independent central bank, risk inflation in the future, work against democratic principles and remove pressures on national governments to make needed economic changes.

On the other side are the governments of Europe — 17 of them that use the euro currency alone, each with its own unique political structure, national interests and idiosyncratic government officials.

Even the vehicles through which these nations are supposed to jointly shape policy — the European Commission and European Union — can each seem like a confusing morass of interrelated bureaucratic entities.

Although everyone acknowledges it would be preferable for democratically elected leaders to make the moves toward economic unity that are the most promising solution for the crisis, it would be much more politically convenient for politicians if the unelected technocrats at the ECB would take those steps and become the channel through which Europe’s losses are realized.

Somebody is going to have to blink.

On some level it’s a political failure, and one that’s even worse that what’s going on in Washington right now. At least we can say that, at some level, the players in Congress and the White House all agree that the national interests are their primary concern, even if they disagree on what those interests are and how to advance them. In Europe, you’ve got 17 different countries who are only semi-unified, some of whom have pursued economic policies that have essentially left them fiscally insolvent, and some of whom are capable of stepping in but obviously reluctant to do so. One would think that the logical resolution of all of this would be an outcome that leads to greater European unity, and that may yet happen. At the same time, though, the games that all sides are playing here are just as likely to bring the whole house of cards falling down, and take the rest of the world with them.

David Goldman argues that a meltdown in Europe is unlikely to impact the United States that severely:

Remember that two thirds of the world’s population (China, India, peripheral Asia, Latin America) is still enjoying strong economic growth. The U.S. economy is weak but not crashing. Europe is a big chunk of the world’s GDP, and it is crashing, but its importance is diminishing by the year. It’s not the end of the world; it’s just the end of the Europeans.

Perhaps not but, like the financial panic in 2008 that started when Lehman Brothers collapsed, national bankruptcies in Southern Europe and a banking crisis throughout the continent aren’t going to stay limited to Europe. Even if we aren’t hurt as badly as Europe, it’s quite likely that the shock the world financial system alone will be enough to push down U.S. economic growth and, more importantly, further depress the already shattered economic confidence of U.S. investors and consumers. Furthermore, even a mild slowdown going into 2012 would have serious consequences for the labor market and, if it’s bad enough to push us into a recession, all bets will be off.

I’d recommend keeping an eye on this one.

H/T: Rick Moran

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Loviatar says:

    On some level it’s a political failure, and one that’s even worse that what’s going on in Washington right now. At least we can say that, at some level, the players in Congress and the White House all agree that the national interests are their primary concern, even if they disagree on what those interests are and how to advance them.

    Doug, one of your party leaders seems to disagree with your statement.

    Mitch McConnell: I Want To Be Senate Majority Leader In Order To Make Obama A One-Term President

    Senate Minority Leader Mitch McConnell: The single most important thing we want to achieve is for President Obama to be a one-term president.

    Like or Dislike: Thumb up 8 Thumb down 1

  2. Loviatar,

    Anyone who doesn’t believe that the leaders of the opposition party don’t consider defeating a President of the opposing party their top priority is naive. That’s politics. But it’s still different from what’s going on in Europe.

    Like or Dislike: Thumb up 3 Thumb down 6

  3. Moosebreath says:

    “On some level it’s a political failure, and one that’s even worse that what’s going on in Washington right now.”

    And on another level it’s another example of what the Occupy Wall Streeters are complaining about. The banks which hold Greek debt are the ones who will primarily profit from any bailout of Greece. They are staffed by people who are paid large sums of money to properly evaluate the risk of loss. And yet, asking them to pay the consequences for their misjudgment is simply not on the table.

    Now, one can argue that allowing the banks to go under will be worse for the world’s economy than pitching in and bailing out Greece. On the other hand, having the banks included in those who are pitching in does not appear to be one of the options.

    Like or Dislike: Thumb up 3 Thumb down 0

  4. MBunge says:

    @Doug Mataconis: “Anyone who doesn’t believe that the leaders of the opposition party don’t consider defeating a President of the opposing party their top priority is naive.”

    If Tip O”Neill considered defeating Ronald Reagan his top priority, he wouldn’t have helped him reform Social Security. If Newt Gingrich had considered defeating Bill Clinton his top priority, he wouldn’t have helped him reform Welfare or balance the buget. The naive among us are those who refuse to acknowledge that what has been going on recently is NOT politics as usual.

    Mike

    Like or Dislike: Thumb up 12 Thumb down 1

  5. Tlaloc says:

    one of the way under examined downsides of globalization is that it’s all one system, and a single system, no matter how “too big to fail”, occasionally fails. More localized redundant economies are not as super efficient during good times but they’re a hell of a lot better during bad times.

    But capitalism only rewards the most efficient during the good times, so we’re stuck with the worse option thanks to the infallible wisdom of markets.

    Like or Dislike: Thumb up 3 Thumb down 0

  6. sanwide says:

    Jeepers. Sounds like a “These damned articles of confederation suck, suck, suck” moment across the Pond.

    Like or Dislike: Thumb up 3 Thumb down 0

  7. john personna says:

    It is a Grey Swan at this point. It is widely understood that there is a problem, but it’s unlikely that anyone will predict the end-game, timing, or aftermath.

    Like or Dislike: Thumb up 0 Thumb down 0

  8. Tano says:

    @Doug Mataconis:

    Anyone who doesn’t believe that the leaders of the opposition party don’t consider defeating a President of the opposing party their top priority is naive.

    If you believe this, then how can you also write this:

    the players in Congress and the White House all agree that the national interests are their primary concern,

    You see to be trying to have it both ways.

    Let us be clear here. The Republicans do not have the national interest as their primary concern. Their primary concern is to win power in the next election. This is NOT the way things always are, else nothing would have ever been accomplished in this country.

    Like or Dislike: Thumb up 7 Thumb down 1

  9. @john personna: More like almost anyone can predict at least one, and usually two, but if you can get all three right (end-game, timing, aftermath), you’ll make a massive fortune.

    My bet is the next couple of weeks will see some type of muddle through solution for another month or two as the markets get some cash thrown at them, Greece continues to not default despite the strong argument in my opinion that their best course is to default and re-adapt drachmas.

    And then we’ll see a Christmas crisis, a Valentine’s Day crisis and an April Fools Day crisis point as we rinse and repeat.

    Like or Dislike: Thumb up 4 Thumb down 0

  10. michael reynolds says:

    Despite all this the Euro stands at about $1.35. A few years back when bad timing had me living in Italy it was $1.60. So it’s down, but by the same token it’s up relative to the $1.20ish we were seeing a year ago IIRC.

    So if the Euro is in such trouble, why is still so expensive?

    Like or Dislike: Thumb up 0 Thumb down 0

  11. john personna says:

    @michael reynolds:

    So if the Euro is in such trouble, why is still so expensive?

    This report from Mid-September might have something to do with it:

    Worried that a mounting debt crisis in Europe could trip up the global economy, the Federal Reserve opened its vault Thursday to the central banks of other countries in an effort to head off a crippling shortage of dollars.

    The main recipient of the Fed’s money is the European Central Bank, which will in turn extend dollar loans to banks in the nations that use the euro currency. Those banks do significant business in dollars, for instance making loans to customers operating around the world, and have been finding it harder to raise dollars from anxious investors.

    Like or Dislike: Thumb up 2 Thumb down 0

  12. ponce says:

    Experts have been predicting the fall of Europe for 2500 years.

    Like or Dislike: Thumb up 0 Thumb down 0

  13. Tano says:

    @ponce:

    Experts have been predicting the fall of Europe for 2500 years.

    Well, they were right a few times in there….

    Like or Dislike: Thumb up 6 Thumb down 0

  14. Dave Schuler says:

    Preventing a meltdown in Europe is absolutely beyond our control. At this late date it may be beyond the Europeans’ control as well.

    What is within our control is protecting our own banks and our own economy from a European meltdown. We don’t seem to be doing squat about that (quite the opposite—we’ve been exposing ourselves more, if anything). Consequently, whatever effect Europe’s financial system’s problems has on us it will be worse than it might have. Prudence just isn’t our strong suit.

    Like or Dislike: Thumb up 0 Thumb down 0

  15. c.red says:

    In agreement with samwide’s comment – it struck me that this is showing a pretty solid example of how a loose confederation of member states has a difficult time functioning in the modern world. For the US it shows going the 10th Amendment route is probably a bad idea and a robust Federal Government has distinct advantages. (And that dumping the Articles of Confederacy and states rights (Confederate States of America) were probably a good plan.)

    Not that I think real world case studies have much impact on conservative thinking. We would not be pushing austerity here if we had been paying any attention to Japan or Britain.

    Like or Dislike: Thumb up 1 Thumb down 0

  16. ponce says:

    Well, they were right a few times in there….

    Haha, I musta missed those times in my reading.

    Did it have something to do with ABBA?

    Like or Dislike: Thumb up 0 Thumb down 0

  17. Ben Wolf says:

    You won’t learn anything about the EU from Shapiro, the man is clueless. The moment he referred to a “sovereign debt” problem he lost all credibility. The EMU members are not sovereign. Were they there would be no debt crisis because each country would have the tools to manage it. Europe can either break up or forge true fiscal unity: there is no other effective option.

    Like or Dislike: Thumb up 0 Thumb down 0

  18. Coogan says:

    “economic union” : now those are the words that scare me. I know that the situation in Europe is not good, but we must avoid getting tangled up in their affairs. This could lead to a one world government. We have been warned about this. This could result in communists trying to take over. And, of course, we all know what happens when the communists take over. The last thing this country needs is for communists to come over here.

    Like or Dislike: Thumb up 0 Thumb down 0

  19. Ben Wolf says:

    @Coogan: What you just wrote is so inaccurate it isn’t even wrong. Suffice to say you don’t need to worry about one world governments or communists. Come out from under your desk and breathe the free air.

    Like or Dislike: Thumb up 0 Thumb down 0

  20. MstrB says:

    @MBunge: I’d still lean that the opposing party in Congress prefers to oppose with the sitting President, a few years worked on an EIS with the Feds not too long after the Democrats took control of Congress and the biggest hurdle to getting it done was all the vacant positions that we unfilled because Congress was not approving any appointments. Its not a new game, its just more of an issue when they are doing it to your guy.

    Like or Dislike: Thumb up 0 Thumb down 0

  21. An Interested Party says:

    Its not a new game, its just more of an issue when they are doing it to your guy.

    Perhaps, but the point is, would Doug have been writing about “the players in Congress and the White House all agree that the national interests are their primary concern” when those roles were reversed…

    Like or Dislike: Thumb up 0 Thumb down 0

  22. mattb says:

    @Coogan:

    This could lead to a one world government. We have been warned about this.

    Considering the track record of one of the biggest proponents of this theory — Glenn Beck — I’m not exactly quaking in my books. Plus everything Ben said.

    Like or Dislike: Thumb up 0 Thumb down 0

  23. Ben Wolf says:

    @michael reynolds: China buys a lot of euros to strengthen the european currency and give Chinese exporters an edge. For now they’ll hold onto them, assuming Europe will find a way to blunder through, but also because converting their euros into yuan will hurt Chinese export competitiveness.

    Like or Dislike: Thumb up 0 Thumb down 0

  24. Robert C. says:

    @Doug Mataconis:

    Doug, you are either naive or in denial. Republicans in Congress have been trying to de-rail Obama’s current stimulus package because they fear it might help the economy, and hurt their chances in 2012.

    RC

    Like or Dislike: Thumb up 0 Thumb down 0