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The Pushback From Europe

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March 16, 2009

There was plenty of action and plenty of inaction in Europe last week, toward addressing the world financial crisis.  Our new Treasury Secretary, “Turbo” Tim Geithner, has been in Horsham, (West Sussex County) U.K., chatting it up with G-20 finance ministers in a run-up meeting to the big London Summit on April 2.  (Meanwhile . . . Who was conducting the “stress tests” on the nineteen “stressed” banks while Turbo Tim was across the pond, eating the awful, British food?  Worse yet:  Treasury still has a few positions to fill.)

We got a taste of the European response to the financial crisis during Sunday’s broadcast of NBC’s Meet The Press.  Near the end of the program, David Gregory asked the BBC’s Katty Kay about the “back story” to the G-20 finance ministers’ meeting in England:

MR. GREGORY:  You’re just back from Europe, Katty, and one of the big debates this week with the administration and Europe is that Europe does not want to do larger stimulus.  And we know that some of the problems in Europe and around the globe with this recession are quite acute.

MS. KAY:  You know, it’s really interesting traveling through Europe this week, and two things really struck me.  One is that there is less public concern about the nature of this crisis, and part of that is that Europeans have a broader social safety net.  I was speaking to a journalist in Sweden who said to me, “You know, if I lose my job, I lose some of my income.  But I still have very good health care and my children have very good state education.”  So people aren’t as panicked by this recession as they are here.  That means that there is less political pressure on European leaders to spend their way out of this and to act some kind of stimulus package, a global stimulus package, what the administration’s been calling for.  There is also a feeling in Europe that they don’t want to have to submit to an American made solution to what is seen by many, by many Europeans as an American made problem.  There is a real resistance here …

Europe’s portrayal of the world financial crisis as “an American problem” became painfully apparent during the recent G-20 finance ministers’ meeting.  As Damien Paletta and Stephen Fidler reported for The Wall Street Journal, the G-20 members exploited the opportunity to pressure Secretary Geithner on solving the problems in America’s banking sector before asking the G-20 to make any efforts toward increased economic stimulus spending.  The G-20 members are well-aware of the Obama administration’s unwillingness to place insolvent banks under government receivership, particularly since this is widely perceived in the United States as being too “un-American”, or worse yet  —  European.  As The Wall Street Journal article pointed out:

The turnaround suggests the limits of U.S. power in the world emerging out of the rubble of the financial crisis.  Many countries, including U.S. allies, are increasingly putting pressure on America to clean up a mess they believe it created.

Mr. Geithner’s actions during the next two weeks will be scrutinized by both Wall Street and world financial markets, which have remained unconvinced that the Obama administration can pull the world out of the downturn.

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Participants said they were pleasantly surprised by the meeting’s unity of purpose, given comments beforehand from the Germans and the French rebuffing U.S. calls to make further commitments to fiscal expansion.  But it was also clear U.S. officials had a long way to go before they could satisfy concerns about the banking sector, which emerged as a surprising point of contention during the negotiations.

“I and some others were expecting much quicker movement on the part of the administration” related to the treatment of banks, said one central banker.

From the Obama administration’s perspective, there can only be one culprit responsible for this attitude about our government’s failure to address the unresolved problem of “troubled assets” (i.e. mortgage-backed securities and the multitude of  ill-begotten “derivatives”) responsible for the questionable health of so many American banks.  This culprit is Nobel Prize-winning Economist, Paul Krugman.  Professor Krugman has written again and again about the urgent need for the Obama administration to face the ugly reality that the “zombie banks” must be placed under government receivership (which is not really “nationalization”).

Fortunately, Professor Krugman stepped up and pointed out (in The New York Times) that if the EU really believes that it doesn’t have any skin in this game, it is in for an unpleasant surprise:

The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.

Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.

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Why is Europe falling short? Poor leadership is part of the story.  European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent.

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You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank.  But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad.  The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.

Europe, in other words, is turning out to be structurally weak in a time of crisis.

What transpired in this trans-continental dialogue was a lot like a volleyball game between politicians and commentators from the European Union against politicians and commentators from the United States.  After the EU team “spiked” the ball over the net —  it hit Tim Geithner on the head.  The ball then bounced away.  Just as the ball passed above Paul Krugman  —  “Boom Goes the Dynamite!”  Nice play, Paul!