A Financial Marshall Plan
A collapse of the Eurozone would be a disaster of 1929-like proportions. But what’s for us in the United States to do about it? The Eurozone is a bigger economy than the USA, and there are a multiplicity of apparently competent technocrats running the show in the EU and its constituent nations confronting the problem. And the Europeans are sovereign nations of their own, so they have the ability, competence, and responsibility to keep their own house in order. So while the European debt crisis is everyone’s problem, it’s not our responsibility.
But does that have to be the case? From an editorial in Al-Jazeera, I see a call for the United States Federal Reserve to guarantee the sovereign debt of every nation in the Eurozone, because the ECB has demonstrated that it simply can’t do the job of keeping a lid on the already-boiling crisis:
…the Fed would be intervening in the European economy for the same reason as China did with the US – to sustain our domestic economy. If the eurozone collapses, there are no easy tools in the Fed’s bag of tricks that will allow it to quickly offset the negative impact on the US economy. It would make far more sense to act preemptively to prevent this disaster from happening. This can be seen as an essential part of its legal mandate to maintain full employment.
I’ll say this for the concept, it’s a bold notion, one guaranteed to frighten pretty much, well, everyone. The author is not insensitive to the political fallout in the Old World but unable to resist a poke:
Of course, this sort of intervention will look horrible from the standpoint of the eurozone countries. It will appear as though they cannot be trusted to manage their own central bank and deal with their own economic affairs.
Unfortunately, this is the case.
He seems less conscious about the fact that there would be both political and economic fallout here in the States. Our own government is exactly as incompetent as the Europeans’ when it comes to addressing the issue of domestic governmental debt — and indeed, while the steps in the dance are a little bit different here, the incompetence has the same origin and the same destination, which are a toddler-won’t-eat-his-broccoli type distaste for spending cuts blended with a fear of tax hikes, with the result of paralysis until a financial crisis is reached. The riots in the streets of Athens and the collapse of the government in Rome are omens of what will happen in Berlin, Paris, and ultimately Washington.
If the Fed guarantees the sovereign debt of Eurozone nations, will the Fed’s ability to guarantee the sovereign debt of the United States fall into question? Granted that the Fed is strong but ultimately what backs it up is the ability of the U.S. government to tax its own citizens and extract sufficient funds to service outstanding debt. There is no such ability in Europe — that power resides with the EU nations and not with the EU, the ECB, and certainly not with the Fed even if some sort of arrangement could get worked out — an arrangement that would ultimately result in a cession of European sovereignty to an organ of the U.S. government.
The author also argues, ultimately, for allowing inflation to take effect in Europe. And by extension, in the United States, where I continue to be mystified that we’ve had as little of it as we have. By all rights we should be in five or six percent inflation now. That’s not to say I’m not feeling some inflation; as a consumer I’ve begun really noticing that my money isn’t going as far as it did, say, about five years ago when The Wife and I relocated to California. Although actual experience has not been as bad as my fears, I can’t imagine how inflation wouldn’t accelerate, both in the EU and here, if the guarantor of the debts were extended this far and the combined US-EU economies were welded that much more closely together.
It’s a big, scary idea. And probably too bold and radical to actually be implemented. One wonders if the BRIC block could be invited to participate and a truly global financial guarantor might not emerge out of the crisis. It could be a substantial stabilizer of geopolitics — if it works.