A major component of the big new Eurozone rescue plan is to substantially increase the European EFSF contingency bailout fund, from 440 billion euros to 1 trillion euros ($1.4 trillion). The fund would then be a substantial firewall, with the ability to lend money to Italy, Greece and other countries at low interest rates, helping them cover their debts until the austerity measures being imposed bring their debt loads under control.
It was what the U.S. and other countries advised.
In his advice to eurozone officials, U.S. Treasury Secretary Geithner told them they need to leverage their bailout fund significantly, like the U.S. did in providing the large emergency loan facilities that helped rescue the U.S. from the 2008-09 financial crises.
President Obama has been saying, “Europe must create a credible firewall to restore confidence in European debt markets.”
On Friday, U.K. Chancellor George Osborne said, “We need to focus on getting a firewall in place. It’s all very well to say we have a firewall, but the eurozone now needs to show the world that it exists and has sufficient resources in it.”
But it doesn’t.
Officials in Europe had hoped the G20 group of developed nations would contribute to the fund. But at its summit a couple of weeks ago, the G20 discussed the situation but ultimately decided it was Europe’s problem, and put off further discussion of possibly providing financial assistance until next year.
U.S. Treasury Secretary Geithner continues to say, “This is Europe’s challenge, Europe’s crisis.”
Federal Reserve chairman Bernanke says, “We’re kind of innocent bystanders. I don’t have any suggestions other than to continue to push them to act. It’s Europe’s problem, not ours.”
Major emerging markets including Brazil, China and Russia had previously hinted they might help, but seem to have backed away from the thought. The Russian central bank issued a statement on Friday that it “has no plans to invest in the EFSF rescue fund.”
Here’s a simple question.
What would be more costly, a ‘smallish’ global effort now to help turn the promising eurozone rescue fund into a market-calming ‘firewall’, or a massive bailout next year from another global financial crisis and market meltdown as was required in 2008?
Because the two choices right now seem to be either the eurozone manages to rescue itself, increasingly questionable, or the world is once again in danger of falling into an economic and financial abyss.
The same folks who say it’s Europe’s problem, let them solve it, seem to agree those are the only possible outcomes.
Treasury Secretary Geithner said this week that the eurozone debt crisis is the single biggest obstacle to global economic growth and “even when Europe stabilizes you are going to see growth damaged by the magnitude of the crisis so far.”
President Obama says, “In the international economy there’s nothing else that comes close to the significance of the eurozone debt crisis.”
Economists around the world talk of a systemic crisis, and predict a default by Greece or Italy would result in collapse of the eurozone and a severe recession in Europe that would engulf the entire global economy.
The crisis has already cost Americans and the rest of the world far more than they probably realize.
Those costs include that the U.S. economic recovery would be much more robust for everyone if lenders, corporations, small businessmen, investors, consumers and potential home-buyers were not so fearful of the recession and financial meltdown they have been hearing for two years now that the crisis in Europe might cause.
With similar fears, in spite of a three-year bull market since the market low in March, 2009, investors are not investing, but have instead parked their money in U.S. and German bonds, hoping it will at least be safe there, even though U.S. bond yields are at record lows, and German bunds are at even more pathetic yields of less than 1%. Without those fears the stock market and 401k plans would be much healthier along with the economy.
Meanwhile those who are trying to invest are being brutalized by the market volatility and whipsawing that follows each twitch in the news reports from Europe.
The U.S. and global central banks spent many $trillions bailing their economies out of the last recession and financial meltdown. The price tag to only ‘help’ Europe in its efforts to increase the size of its EFSF bailout fund to ‘firewall’ proportions now, would be much less than it might be down the road, and a ton less than having to rescue ourselves from another Great Recession.
Because, as Timothy Geithner has also said “These things have a dynamic that the longer you wait the harder they are to solve, and the more expensive they are to solve.”
I realize it would sure be unpopular. Bailing out our own banks in 2008 to prevent a plunge into a Depression was unpopular enough. Let them go under was the prevailing wisdom. They deserve it and if the price we have to pay is putting the next generation into a Great Depression so be it. You can imagine how unpopular it would be to add even minimally to our debt problems in order to help rescue Europe, even if in the process we saved ourselves from a repeat of 2008.
But it is something governments around the globe should probably be thinking about.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.
Images: Flickr (licence attribution)
About The Author
Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!