THE EU IN CRISIS: A SINKING SHIP BEYOND RESCUE?

In private sideline conversations between
principals during the G-8 summit meeting at
Camp David, some significant decisions were
made that will impact the long-term fate of the
European Union over the coming weeks and
months.

Those conversations centered on the decision
to plunge ahead with the bailout of the
European banks in an effort to save the Euro
system, with Greece still inside. The prime
influencers behind this decision were Managing
Director of the International Monetary Fund
Christine Lagarde and President Obama. Both
Lagarde and Obama are concerned that if Greece
leaves the Euro, the contagion will spread to
Spain, Portugal, Ireland, and, perhaps, even
Italy. President Obama’s unspoken motivation
in preventing a financial meltdown of the Euro
system is the possibility that it would almost certainly
spill over into Wall Street and adversely
affect the U.S. economy.

Christine Lagarde put the IMF squarely
behind a bailout of the European banks, with
the full backing of the U.S. Federal Reserve and
Treasury to boost the leveraged lending of the
European Central Bank (ECB) to prop up the
European banks. The ECB will likely take junk
bonds and other vastly over-priced assets as collateral
for loans to the Spanish, Greek and other
European banks—a move that will offset an
additional estimated $500 billion in new writeoffs
by bondholders of Greek debt.

So, the IMF, the Obama Administration
and the ECB appear to have colluded to further
delay the reality of the financial and banking
crisis through what are–by any measure–very
risky, hyperinflationary measures. From the
Obama Administration’s perspective, however,
the strategy will have succeeded as the crisis is
effectively postponed, taking many months to
fully play out (versus days or weeks), well past
the November elections in the United States.

In his sideline meeting with new French
President Francois Hollande, President Obama
reached a full agreement on this perpetuation of
the Euro. This is an area where Hollande and
German Chancellor Angela Merkel will agree
to disagree. They both want to defend the Euro,
but Hollande will continue to insist that austerity
must be limited and a growth program initiated.
While the feasibility of such a dual-track program
is questionable at best, it is nonetheless the
growing agenda of the Euro-socialists, including
Hollande, Germany’s Social Democratic Party
and the Italian Socialist Party. A majority of
Greek voters are in favor of staying in the Euro,
so long as the austerity is reduced.

Hollande will make continued efforts to push
for Euro bonds as one way to implement this
bailout plan. Merkel will continue to oppose and
block the Euro bond argument. Merkel recently
told her party that “under no circumstances”
would she agree to a Euro bond strategy.

“A Euro bond would take a few years to
implement because there are lots of technical
issues to solve and also implementation of the
Euro bond procedure would take several years,”
Finnish Prime Minister Jyrki Katainen says. “So
Euro bond[s] are not a solution for this current
crisis,”

The total amount of assets on the books
of the US Federal Reserve and the European
Central Bank, combined, fall well short of the
currently estimated 4 trillion Euro liability of
the European private banks—something that
U.S. Treasury Secretary Timothy F. Geithner is
acutely aware of.

Treasury said, in a written statement, that
Katainen and Geithner recently met and “discussed
the global economy, including the United
States’ economic recovery and the plans of
European leaders to reinforce the institutions
of the Euro area.” Federal Reserve Chairman
Ben Bernanke, conspicuously absent from the
Treasury statement, also was also present and
participated in the same discussions.

Both Bernanke and Geithner are said to be
extremely worried about the worsening trajectory
of the Euro crisis. While they know they are
in a position to delay a breakup of the EU, they
may well be powerless to prevent it if the downward
spiral continues unabated. Geithner’s
message has been a clarion call to EU leaders to
address their core problems now, not later. With
unemployment at depression era levels, and the
periphery of the EU experiencing zero growth,
the massive deficits of countries like Greece,
Italy and Portugal are simply too large to bail
out, even with U.S. help.

So, while EU politicians sit on their deck
chairs, discussing ways to achieve deeper integration
in the 17-nation euro area, Germany,
Austria, and the Netherlands are privately donning
life vests, preparing for the EU ship to sink
in cold, unchartered waters.

When that happens, the well-practiced
S.O.S. call will go out to U.S. rescue ships in
the area, as always, only to find out that they’ve
run out of gas.?