If countries at the very center of the global economy shift to new currencies in a panic and at a time of global recession and large-scale defaults, the complex web of transactions underpinning international trade and finance will be stretched to the breaking point. European governments’ access to bond markets is already impaired and may disappear altogether if investors are uncertain about the currency denomination of their claims. Banks will cut trade finance if they are in danger of being repaid in highly depreciated national currencies, while importers may be unwilling to borrow in dollars if the local-currency cost will soon be prohibitive. Swaps and futures markets will not function if investors are uncertain about the value of repayment. Stress tests to see how currency systems would work in the event of a euro breakup show unequivocally that a very long time and large resources would be required to get the global systems functioning smoothly again. U.S. regulators are already urging banks to reduce their European exposure and identifying vulnerable financial institutions, but this merely adds to the pressure on European governments.
Instead of traveling all the way to Europe, Secretary Geithner should take a car ride down Pennsylvania Avenue and tell a recalcitrant Congress the bad news. Europeans cannot handle this crisis on their own. Germany, the only country in the euro zone that is remotely safe from a market panic, can help Greece, but it cannot rescue Italy and Spain. German debt is already 80 percent of GDP, and Italian debt alone exceeds it. The euro zone is a monetary union, not a political union, and not a country. Even if it were, would you expect New York to bail out California? Blanket European Central Bank guarantees to purchase Italian and Spanish debts would not solve the underlying problems: would you see a Fed guarantee as the solution to the problems of Michigan?
The only sensible short-term solution is an adjustment program carrying tough conditionality, sponsored by IMF and the European Financial Stability Facility. To cover Spain and Italy’s financing needs over the next three years, the likely timeframe an adjustment will require, requires an additional $2 trillion. That’s the size of the “bazooka.” Half of this should come from the euro zone and the other half from the IMF. The IMF has about $400 billion available, but it needs it to support the rest of the world if the crisis worsens, so the $1 trillion is the net addition it needs. The U.S. share of this is about $160 billion if the euro zone can cover its share of expanded IMF resources in full—but may be higher, perhaps $250 billion, if it cannot. The rest will come from China, Japan, the UK and a host of advanced and emerging markets. If we take the lead, we can make it happen—in fact, we are the only ones that have the heft to do so.
This adjustment program is a loan that may never be disbursed, not a gift. It is not an outlay but a contingency. If it is disbursed, we are very likely to get our money back based on a long track record of IMF lending, which is senior to all other debt. The borrowing countries will be subject to heavy conditions, but we will also insist that conditions be imposed on the European monetary union as a whole: they must ensure that the program is sound, receiving proper support and moving ahead with reforms to make the union sustainable in the long term and prevent a similar episode in the future.
If the United States does not act, all bets are off. We may well have a Lehman repeat, or perhaps worse: the bad debts are much bigger, and so much fiscal and monetary ammunition has been spent already. Europeans will long remember that we stood aside in their time of need. Moreover, if China, Brazil and Mexico end up helping (they seem amenable provided Europe gets its own act together) but we are missing in action, the blow to our prestige will be immense. Europe and the whole world will see it as irrefutable evidence that America’s days as global leader are numbered.
In other words, the message to Congress is that the question is not whether the United States will pay for the Euro crisis (it will) but how.
Uri Dadush and William Shaw are scholars at the Carnegie Endowment for International Peace. They are the authors of Juggernaut: How Emerging Markets are Reshaping Globalization (Carnegie Endowment, 2011).
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Just my opinion, and maybe I'm wrong, but I think it would instead be an immense credit to our intelligence. This debt situation is like a cancer, and when it started threatening here our answer was essentially to feed ourselves titanic amounts of the kind of ice cream that caused the problem in the first place in the form of deficit-financed bailouts and etc., promising that while the ice-cream was anesthetizing things we'd find and agree to some tough cures. Both for the banks and etc. and for our government.And yet we have so far it appears that we have agreed to absolutely nothing really meaningful, with just about everyone agreeing the cancer, predictably enough, has gotten worse. Now the metastasized body called Europe is throbbing, and here once again we hear calls to feed Europe (yet more) ice-cream. (More because our Fed has already pumped a helluva lot into Euro banks). And we are told we can do this safely because we would please pretty-please insist they promise to take cures far far worse than the kind we won't even take, and indeed the kind of cures that would likely inspire actual revolutions in some of their members. Cures that such revolutions would, as their first official act on their first day, vehemently renounce. Just how, exactly, are we going to guarantee that Italy, say, is really really really going to start (and keep) doing what it's never done before and actually enforce its tax code? Or that Greece is going to permanently cut some staggering percentage of its incredibly bloated government "work" force without undergoing a revolution? Or that Spain, Portugal and God-knows who else are all going to do ... what?I have no doubt that the default of a Citibank or Goldman Sachs or Italy or a crash of the Euro would indeed cause big chaos in the world that the authors of this piece live in. Everything in their universe would change as many of the formers powers they are so accustomed to would get blown away and new powers started springing up. But my sense is that the world for the average person wouldn't change nearly so much, so that all these calls for never-ending bailouts aren't really about preserving the situation of that average person, but instead about preserving the sand-box these authors play in. A sand-box full of stupid-at-best-and-corrupt-more-likely old powers they just can't imagine ever changing.But change is inevitable, with the question thus being whether you're going to husband your resources and weather it, or commit suicide by trying to prevent it. Again, just my opinion, but while everyone seems to agree that the problem has been too much debt ice-cream, I never seem to see any explanation of just how exactly force-feeding ever more is going to ultimately solve it. And the authors of this piece have certainly never even addressed this issue either.
What kind if scam are these politicians trying to run now. The FED has given many billions is secret loans already. These bailouts will end very badly for everyone, that is how WARs are started. You can not solve a debt crisis with more debt. The worse is yet to come for the Euro zone. What happens when Italy and Spain find them selves in the same position as Greece. It will be sovereign pandemonium across the European continent. What we saw in 2008 is gonna look like a walk in the park. The euro currency is finished. Once the markets figure this out watch the dow jones index and the sp500 and all indecies around the world crash in a spectacular fashion.
Euro zone crisis is proceeding and Europe needs more money to fix their financial problems. Everybidy thought that Europe and euro are strong, but as we can see euro slowly falls down today. On one hand it's not bad for the US, it makes the dollar stronger,but on other hand, euzone crisis can become a disaster for the US. I agree, crisis is like a cancer, Europe is an important economical part of the world, they had a stable economy, rich countries and strong currency, today European countries borrowing money to stay afloat and I am sure, in one or another way this crisis will affect the world, not only US.