European leaders are convening this week to discuss the worsening economic conditions in their Union. A New York Times article today summarizes the plethora of issues surrounding the EU and what needs to be discussed at the meetings. A summary follows.
*Economic activity is at a low level and so there is massive and growing unemployment.
*Banks throughout the EU are in dire straits. In Spain, for example, real estate credit losses have weakened many institutions. Short-term bailout money has done little to alleviate the situation.
*Banks must lend to support a recovery, but they do not have the wherewithal or the capital to do so. *Germany and a few other northern European countries are the only sources of economic strength in the EU. Understandably, they are hesitant to offer financial support without control regarding the use of new funding and terms of borrowing.
*Terms of borrowing, in the eyes of German leaders, include austerity measures in the highly leveraged countries. This flies in the face of the Keynesian solutions of stimulus proposed by the weaker countries.
*Greece, Spain and Italy have borrowed too much to support their inefficient and wasteful habits. There is pressure for these countries to reduce debt. In the meantime, investors are escalating their borrowing rates.
*Bank deposits are being withdrawn from banks in weak countries and re-deposited in banks in Germany and the Netherlands. This flight of capital from Greece, Spain and Italy is paralyzing banking operations.
*The continent needs teamwork to get through the crisis. Unfortunately, it is difficult to orchestrate a plan when some countries are being asked to take on risks for others that have not been governed efficiently.
*Germany is the key to an EU revival. It must, for all intents and purposes, support the borrowings and the deposits throughout the continent.
What does Germany need before it will agree to save the EU? The answer is monetary, fiscal and political control. In an earlier article, I suggested that the current economic crisis was an opportunity for Germany to assert itself as the undisputed leader of the EU. I stand by this thesis. Whether this objective is influenced by Germany’s stormy 20th Century relationship with the EU countries is moot. If I were leading Germany, I would not give my chronic spending neighbors one dime until they changed their free spending ways.
The continent needs to stabilize its banks, create infrastructure projects to increase employment, centrally backstop all banks with a deposit guarantee from Germany, cede budgetary control to a centralized government organization that oversees members and reduce debt through austerity. Until these things are accomplished, the euro will deteriorate, the creditworthiness of the EU weak sisters will worsen further and the entire world will not be able to recover economically.