Monday, May 10, 2010

Europe’s Free Lunch? - The Source - WSJ

I'm trying to sort out the longer term implications of the moves by the European Union (helped by the Fed) last night. These actions - a nearly $1 trillion package of loan guarantees, government debt purchases and direct loans to Greece - were meant to calm the continuing euro crisis.

The markets today are roaring ahead, so the plans so far seem to be well-received.

My preliminary thought is that all of this sounds very much like the plans that the quantitative easing policies that the Fed and the Treasury put together in the fall of 2008.

Our government's actions seemed to have worked: US economic data continues to show signs of improvement, and now most of the official discussion in Washington seems to revolve around when some of the liquidity should begin to be removed from the capital markets.

The question that I have revolves around whether the euro block - a group of independent countries bound together for the sake of mutual economic benefit - will be able to work together like a single country, like the United States.

The euro works, it seems to me, so long as the majority of countries benefit. Once the costs of maintaining the euro become too great, however, the whole concept become endangered.

As I read the press, it appears that the ordinary European is far from convinced that the euro zone is worth bearing huge economic burdens. There is of course the rioting in Greece, with three bankers killed. Then there was the huge losses that German Chancellor Merkel's party suffered over the weekend in regional elections. French President Sarkozy's popularity rests at all-time lows. And while Britain is not part of the euro block, the incumbent Gordon Brown was crushed in U.K. elections, and resigned today due to widespread dissatisfaction with the Labor Party's economic policies.

I came across this note today from in a blog from the Wall Street Journal. The full link is below, but here's a key paragraph:

...In order to ensure quantitative easing doesn’t trigger rampant consumer price growth, {Germany} will make every effort to enforce austerity across Greece, Spain and Portugal. Governments will be made to stick to their promises of fiscal probity, of tax hikes and spending cuts, come what may. This, in turn, will drive peripheral Europe into depression and deflation. Their debt loads will remain as onerous as they’ve ever been, but they also won’t have much in the way of growth.

For these countries, this free lunch won’t seem free and it won’t have felt like lunch either. Germans will come to be seen as mercantilists, benefiting at the expense of their European partners. The euro will be seen as a straight jacket for them, boosting German exports but keeping peripheral Europeans in permanent recession.

Europe’s Free Lunch? - The Source - WSJ