No To a Collapsing Europe and the Return of the Great Recession


(B) We did painfully learn in August of this year, during the US debt ceiling crisis, how it is difficult for one country to do the right “thing”. Now imagine, how difficult it is for 17 countries to do many right “things”, especially if first those right “things” to do are quite complex to achieve, and second if the 17 countries have not in place the appropriate structure to implement them!

So what Europe should do, why Europe is not doing it, what the rest of the world should do, and what are the risks both for the Europeans, and for all of us…following is a simple FAQ (Frequently Asked Questions):

What should Europe do?

 Stop European austerity measures – The European Central Bank (ECB) should lower interest rates and favor credit easing
 Provide a large-scale liquidity program to assist Italy and Spain that are solvent – The present European Financial Stability Facility (EFSF) of 440 Billion Euros being approved is not enough to respond to the needs of Italy and Spain that might require from 2 to $3 Trillion Euros
 Manage an orderly default of Greece through a restructuring of its debt
 Provide the equivalent of the 2008 US TARP program to recapitalize European banks to avoid a European credit crunch
 Germany should favor policies that are not by nature austere but stimulate internal consumption

Why is not Europe doing it?

 Europe has a monetary union through the Euro but no political, economic, social and fiscal union. In a nutshell, the German workers do not feel that they need to pay for the misfortunes of their Greek peers
What should the rest of the world do?
 The US, Japan, Canada, England, and other Western Countries should have monetary and fiscal policies that stimulate their economies and feed worldwide economic growth
 Fast developing economies such as China that rely heavily on exports should develop policies that simulate their internal demands

What are the risks?

 The risks are very high both because of the complexity of the macros, and the lack of time to soften a brutal deleveraging of debt burden European countries and banks
 A very weak Europe will weaken all other western countries, and all developing countries. The best scenario would be slower growth of worldwide economies, and the worst scenario would be another 2008 Great Recession.

For more food for thoughts, please read, listen, understand, question, agree and/or disagree with the following:

Professor Nouriel Roubini

His latest thoughts:
 “How to Prevent a Depression”, Project Syndicate, September 19
 “Risk of a Depression is Huge”, Emerging Markets, September 26

PIMCO Mohamed El-Erian

 “Europeans must not let their “Washington Intervention” go to waste”, Reuters, September 26

George Soros

 “The Road from Depression”, Project Syndicate, September 29
 “Does the Euro has a Future”, The New York Review of Books, October 13

The Economist:

Until politicians actually do something about the world economy…be afraid”, The Economist, October 1st

Note: the picture above is La Fountaine Saint-Michel in Paris.

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Categories: Economy, Financial Markets