Dark Times For the Eurozone

Things are looking pretty bad over in the Eurozone, with CNBC’s Jim Cramer calling the situation “DEFCON 3, two stages from a financial collapse so huge it’s hard to get your mind around.”  Cramer is a high-voltage guy, but he’s not the only one talking this way.  Wolfgang Munchau of the Financial Times turned many heads by predicting “the Eurozone has 10 days at most,” after watching Italy hold a funereal disguised as a bond auction.

On Tuesday Reuters ran an article about international firms preparing themselves for the post-Euro world:

Planning for a breakdown of Europe’s 17-nation single currency is not easy. Like many business leaders, [Novo Nordisk CFO Jesper] Brandgaard views a break-up of the euro as possible though not yet probable — but the odds are increasing. In a Nov 23 Reuters poll 14 out of 20 economists said the single currency would not survive in its current form – and companies are starting to plan for a worst case scenario.

Their trepidation is best summed up by Martin Sorrell, the head of the world’s biggest advertising agency WPP. “The complexity fills everybody with such appalling fear and is so complicated that the last thing in the world you want to happen is that,” Sorrell told Reuters on Monday. “But the honest answer is that, like everybody else, you try and contingency plan for any break-up of the euro zone.”

Among those contingency plans are “war games” conducted by top brokerages and investment banks, including U.S. firms, to handle the collapse of the Eurozone in real-time. 

American involvement in the Euro collapse could go far beyond stuffing different bills into the cash drawers at currency exchanges.  Obviously an unprecedented financial crisis ripping through nations that do a lot of business with American firms would deal a horrible blow to our already shaky economy.  One of the reasons it’s such a bad idea to set an everyday baseline of staggering government debt and moribund economic growth is that it leaves us very little reserve strength to deal with crises.

We might find ourselves dealing with this particular crisis in a more direct manner.  Last week, Jim Pethokoukis of the American Enterprise Institute laid out three scenarios in which Washington could end up bailing out Europe, despite the mutual rage of the Tea Party and Occupy Wall Street types: a trillion dollar “Super TARP” bank bailout; a “global liquidity” operation fed with bags of cash slipped out the back door of the Treasury; or a massive American purchase of European bonds that would amount to taking out a home equity loan on the European house we built through the Marshall Plan.  As we saw during the U.S. subprime mortgage crisis, when Uncle Sam hears scary talk of “unprecedented” crisis, his checkbook slides easily into his trembling fingers.

There are still some last-ditch measures under consideration, as reported by NPR:

The 17 finance ministers of the countries that use the euro converged on EU headquarters Tuesday in a desperate bid to save their currency — and to protect Europe, the United States, Asia and the rest of the global economy from a debt-induced financial tsunami.

The ministers were discussing ideas that would have been taboo only recently, before things got as bad as they are: countries ceding fiscal sovereignty to a central authority; some kind of elite group of euro nations that would guarantee one another’s loans but require strong fiscal discipline from anyone wanting membership.

German Chancellor Angela Merkel reiterated her support for changes to Europe’s current treaties in order to create a fiscal union that will include binding and enforceable commitments by all euro countries.

Merkel acknowledged Tuesday that changing the treaties — usually a lengthy procedure — won’t be easy because not all of the European Unions 27 member states “are enthusiastic about it.” But she dismissed reports that the eurozone, or some nations within the bloc, might go ahead with a swifter treaty between governments.

There seems to be growing support for tighter European integration, particularly “Eurobonds” that would be jointly issued by all 17 member nations.  However, German chancellor Angela Merkel has repeatedly rejected this proposal, because it would “ease pressure on weaker countries to reform their economies,” as the Washington Post puts it. 

Instead, Merkel believes “members need to give up more sovereignty, including surrendering some control of their budgets.”  Unsurprisingly, Germany doesn’t like the idea of other member nations hiding their systemic problems behind Eurobonds.  The Germans are tired of being handed the bill after the rest of Europe’s crazy fiscal parkour stunts land them in the hospital.

The sovereignty handover Merkel wants might be a tough sell to local populations who have taken to rioting in the streets when their own governments implement austerity measures.  The flip side of Merkel’s Eurobond rejection is the grim realization that dead-end Euro states have used the expanding size of their international government to become more irresponsible.  Reforming a nation-state demands enormous pressures.  The belief that someone, somewhere, is standing by with a plump last-minute bailout causes those pressures to dissipate.  It allows local governments to please the man on the street by avoiding hard choices.  Now the German man on the street has just about had it with all the men on other streets.

The Eurozone has two basic paths before it: double down on even tighter integration, at increased cost to the self-determination of individual national populations, or pull out the frayed stitches holding the Euro monster together and let the whole thing collapse.  Looking at the way things have gone so far makes doubling down look like the riskier bet, but it would involve less short-term pain… and long-term thinking has gone completely out of style in Western capitals, most definitely including the one along the Potomac.  Washington had best prepare for a rash of 3:00 AM phone calls from various historic locations, where mighty kingdoms were seated in bygone days.