The U.S. Bails Out a Profligate EU
Bailouts: Treasury Secretary Tim Geithner was dispensing advice in Europe Friday as the Fed began printing massive amounts of money to bail out the EU. Our government seems more worried about Europe than the U.S.
With Europe on the verge of another financial crisis, the Federal Reserve and European officials announced a three-stage "liquidity" program under which the U.S. central bank will supply dollars so Europe can buy its own bonds and keep the region's economy from going under.
Geithner and the Fed are doing in Europe just what they did here: printing huge amounts of dollars and using them to buy public debt, a kind of mega-stimulus.
This may stave off a collapse of Greece, or Italy, or Spain, for a while. But ultimately, it will fail. After the default of Greece and one or two other fiscal wastrels, the euro zone could collapse - with disastrous results.
Why? This mega-stimulus fails to address the euro zone's actual problem - just as $3 trillion in "stimulus," TARP and Quantitative Easings I and II in the U.S. failed to address our problem: too much debt from too much spending.
In 2007, the euro zone's public debt was a high but manageable 66%. Today, it's 88% - and rising fast - in the danger zone for mass defaults. "Europe is in danger," warned Polish Finance Minister Jacek Rostowksi last week. "If the euro zone breaks up, the European Union will not be able to survive."
In that context, our actions in fact amount to a bailout not only for European Union banks - but also our own.
As columnist Robert Samuelson notes, "Europe accounts for about 22% of U.S. exports. It provides perhaps an eighth of the foreign profits of major U.S. multinational firms. U.S. banks and investors would suffer losses on their European loans and investments."
And that doesn't include the $658 billion lent to Europe by large U.S. money-market funds.
Bailouts won't last, however, because euro zone countries have been reluctant to follow fiscally responsible policies. Under the original Stability and Growth Pact that established the euro, countries were required to maintain deficits of 3% of GDP or less, and to keep their total debt burdens below 60%.
But it had no teeth. There was no real way to punish members such as Greece, Spain, Italy and Portugal that spent themselves into bankruptcy and then expected wealthy nations such as Germany and France to bail them out.
German Chancellor Angela Merkel has come under intense pressure from other European nations to come up with more money. Some in Europe have even proposed creating new "euro-zone bonds" backed not by individual countries, but by all zone members.
This would be a huge, irreversible mistake leading to the eventual bankruptcy of all 17 nations that are part of the euro zone.
The real problem is that Europe has created a massive welfare state that its shriveled, undynamic economies can no longer support. Until this is recognized and spending is slashed, its profligate nations will only careen from disaster to disaster.