Why Europe Won’t Implode
The global financial system is currently being roiled by one thing and one thing only: the fate of Europe. This past weekend, high-level meetings of both the International Monetary Fund and the G20 nations took place in Washington, and the predominant focus was on Europe and whether the nations of the European Union and the euro zone would be able to stave off what increasingly appears to be a make-or-break crisis over banks, the sovereign debt of Greece, and the stability of the international financial system.
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Contrary to what many are now predicting, Europe—reeling though it is—will not implode.
The fear is that the European Union as constituted doesn’t have the ability to move quickly enough. It isn’t the size of Greek debt per se, but the fear that the hundreds of billions of dollars potentially exposed will so undermine European banks that the whole system—and that means the entire global banking system—might be imperiled. With so many actions dependent on each of the legislative branches of the 17 euro-zone countries, there is a viable concern that real-world events will move far more rapidly than the political institutions can respond. A Greek default on debts would then trigger various runs on French and German banks, which would then lead to massive selling of any liquid assets anywhere—and stocks above all—which would then cascade around the globe in a fashion not unlike what happened after Lehman Brothers collapsed three years ago this month.
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The widely shared belief is that the United States is either in or on the verge of a recession; that China is slowing precipitously based on weakening exports, imploding urban real-estate bubbles and slack consumer demand; and that Europe is on the verge of an unraveling as historic as the forces that brought it together 20 years ago when the European Union was formed.
So the question is, will Europe implode? Contrary to the widespread assumption, I think not.
It isn’t just that Angela Merkel, Germany’s answer to Margaret Thatcher, has drawn what for her is an unequivocal line that Greece will not leave the European Union or the euro zone. It’s that slowly, sloppily, the governments of Europe are awakening to the realization that since they have tethered their collective economic fate to each other, the costs of unraveling are so immense as to be untenable. No government feels comfortable demanding more funds to bail out Greece or shore up banks or create a backstop for the tenuous finances of Italy. But each government understands at some animalistic level that no electorate will celebrate the consequences of doing too little. Even those supposedly dour, disapproving burghers of Düsseldorf who are tired of bailing out what they see as profligate Greeks would blanch at the market consequences of the end of the euro. Germany doesn’t just pay to maintain that union; it benefits mightily as well.
There is no way to prove that the officials of the EU will access their better angels at the last moment (however auspiciously named the German chancellor is). But this crisis is shaping up as the European version of the American debt-ceiling debate: messy, disheartening, but when pushed to stare at the alternatives, deeply clarifying. [...]
This article makes some good arguments as to why the EU will try to hang in there and make it work; they have invested too much in it. They won't let the EU unravel, because the consequences of that aren't likely any better than what they are facing now.
But the article does not convince me that they can avoid financial implosion. Sure, they are motivated to stop it. Yes, they would not just "let" it happen. But the question is, do they have the power to STOP it from happening?
Clearly, they are going to try. And clearly, whatever happens, the effects will be felt globally, in our Brave New World. Lets hope it's Brave enough.
Also see:
Merkel risks rebellion on euro rescue fund
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