Continental Divide
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Continental Divide
Could bank failures threaten the European Union?
Posted Monday, October 6, 2008 - 2:22pm
The dangerous flip side of that coin is that if the EU's economic institutions are weakened by either policy or fate, then the progress that the union has achieved—particularly in once-struggling countries like Ireland, Spain, and Greece as well as the newer Eastern European members—could be threatened.
A lynchpin of this success has been the EU's growth-and-stability pact, basically an agreement among member nations to keep their fiscal houses in order. The pact mandates, among other things, that budget deficits be kept below 3 percent of GDP (something recent American governments have been unable to do). At the hastily assembled summit this weekend, the leaders of France, Germany, Italy, and the United Kingsom announced that the European economy is facing "exceptional circumstances." That phrase was intended to legitimize the individual bank actions mentioned above. But there has long been tremendous pressure on European governments to find ways around the pact, and if "exceptional circumstances" are used as an excuse to do that, then confidence in the EU economy and currency could be undermined. (Indeed, Monday was the worst day for the euro against the yen since trading began in 1999.)
The European Union is, in its details, a frighteningly muddled, multiheaded beast, but from a macroeconomic point of view, it has been massively successful. The currency is stronger than its most passionate advocates would have guessed, and by allowing EU members to trade among themselves without currency-exchange costs, it has been a tremendous boon to trade. Even exports beyond the EU—which you might expect to fall, given the strength of the currency—have more than held their own, essentially doubling over the last 10 years.
None of that, however, can protect against the contagion of unpaid mortgages and the flawed financial instruments built on top of them. And the European Union is already unpopular with many voters for reasons more political than economic. If credit markets seize up and drive Europe into a serious recession, the EU itself could readily become the scapegoat.
Euro Divide
Comments
francoamerican
Francoamerican, you are quite mistaken in portraying the author's comments as mere ideological wishmaking. James Ledbetter is not, as you contend, a "rightwinger." A former staff writer for the leftist Village Voice and stints writing for, among others, Mother Jones, the Nation, and The American Prospect should be enough to disabuse anyone of that notion. If not, check his most recent book - Dispatches for the New York Tribune: Selected Journalism of Karl Marx.
Ledbetter may be right or wrong, but you can't escape from his arguments by raising the "rightwinger" shibboleth.
To quote: "From this
To quote: "From this continent, the question arises: Shouldn't the European Union be handling a bank bailout? After all, Europe's largest economies—except for the United Kingdom's—have used a unified currency since 2002, and the European Central Bank sets interest rates for all the countries in the economic union (again, this excludes the United Kingdom but includes the largest economies on the continent)."
There's at least one practical reason why the EU isn't forefronting the bailout, apart from several strictly political and self-serving reasons: in the EU, the financial markets are still supervised by each member state, and in Euroland the banks are still monitored by the former central banks (the ones that already existed before the European Central Bank was born and took control of the currency and interest rates).
Given this situation right now, it's those national control entities that can better assess what needs to be done to protect the banks from bank runs, and the financial markets from the attacks of organized traders, and how much needs to be spent on "toxic assets", not the EU.
On a lighter note, if it's true that schadenfreude was felt in the EU as the crisis was unraveling in the US, it is also true that some people in the US always expect the EU to work on the level of an Albanian brothel, and I think that shows a little in this article.
(sorry if I offended any Albanians)
European Banks and the euro
While most of the "euro zone" countries experienced a sense of schadenfraude watching the wall street meltdown ,now, that their banks are failing apart at the seams state of - each man for himself - desperation.
And the dollar is strengthening.
I'd like to be able to take
I'd like to be able to take this as a source of wisdom but unfortunately you let yourself down immediately by stating "Fortis, Belgium's largest financial-services firm, went under last week and has sold off parts of itself to France's BNP Paribas and the Dutch government.". Fortis was actually a PAN-National bank, crossing the whole of Benelux. This has now unravelled, with the Dutch part hived off, and the Belgian (and I think Lux) part now heading toward becoming part of a different PAN-National bank built around BNP Paribas.
As for the EU, you must understand that it is far above all else a political animal with serious will to overcome historical conflicts. The Euro is a separate issue. So, will the EU survive. My belief is that not only will it survive but it will become stronger as a result of this crisis. I also believe the Euro will survive and become stronger, but this story may have some kinks, with crisis being used to resolve long standing issues with the sloppy economic policies of certain countries (eg Italy). Maybe a country or two could be kicked out of the Euro?
You might want to point out
You might want to point out that the problems European banks are now experiencing have nothing to do with bad (=subprime) mortgages (as the author of this article seems to imply), but with the purchase of mortgage-backed securities from the fraudsters on Wall Street.
I agree with Cashking that it is highly unlikely that the EU will collapse because of this crisis---although many American rightwingers (like the author of this article?) would no doubt rejoice to see that happen. They just cannot imagine that any government, let alone supergovernment like the EU, can be successful unless it adopt their discredited ideology.