HOW NOT TO SOLVE A CRISIS
THERE is a delicious moment in the HBO film Too Big to Fail when Christine Lagarde, then France’s minister of finance, calls Hank Paulson, the US Treasury secretary. It’s September 2008, and “Hank,” she scolds him. “How could you let Lehman fail? What on earth were you thinking?” She pleads with him to save AIG, which appears to be the next domino poised to fall.
“This is not just an American problem,” she concludes. (Note: I served as a consultant on the movie.) Oh, the irony! Here we are, more than 3 1/2 years later, during which time the eurozone has repeatedly flirted with financial catastrophe. Lagarde now leads the International Monetary Fund, which exists, in large part, to help countries survive such catastrophes.
Yet neither she nor anyone else in Europe has been willing or able to do more than use Band- Aids to stanch the bleeding.
A eurozone meltdown, if it comes to that, would be devastating to the already battered economies of Europe, leading to widespread credit contraction, mass unemployment and depressed economies across the Continent.
But it would undoubtedly take a toll on our economy as well – and it would be a huge blow to President Barack Obama’s reelection prospects. To paraphrase Lagarde, this is not just a European problem.
The American and European responses to their respective financial crises are studies in contrast.
The Bush administration and the Federal Reserve took an “all-hands-on-deck” approach: not just saving AIG and recapitalizing the banks, but buying billions of dollars worth of subprime mortgages that were poisoning the banking system, and guaranteeing virtually all bank debt. Say what you will about the moral hazard that comes with bailing out too-big-to-fail banks, the strategy worked. By announcing to the world that it would serve as the lender of last resort, the federal government prevented a banking collapse, and, quite possibly, a depression.
In the eurozone, there is no lender of last resort. Germany, which has the money and the clout to play that role, refuses to. The European Central Bank is constrained by politics and its own narrow sense of mission. Just last week, it declined to lower interest rates – in no small part, said its president, Mario Draghi, because “I don’t think it would be right for monetary policy to fill other institutions’ lack of action.” Throughout the euro crisis, the response of Europe’s political leaders has been tepid, reluctant and unconvincing.¬ They are willing to kick the can – and no more.
The decision over the weekend to lend Spain $125 billion to shore up its tottering banking system is typical. For one thing, it’s unlikely to be enough. For another, it will do very little to improve Spain’s underlying problems – including 25 percent unemployment, an economy in steep decline and a growing federal deficit that may require its own bailout.¬ You wonder why people are already speculating that Italy will be next? Because there is no investor confidence that the problem has been solved. Why would there be?¬ It hasn’t been.
One critical difference between America and the eurozone is that we have one government and they have 17. For all our fractious politics, in September 2008, our government’s financial officials spoke with one voice. In Europe, the politicians and finance ministers in each of the 17 countries that make up the eurozone have to deal with their own nations’ political dynamics.
The Germans are sick of being asked to save what they see as the ne’er-do-well Greeks. The Greeks are just as sick of the austerity programs that the Germans have imposed on them. On Sunday, Greece will go to the polls – and could well elect a government that will renege on the deals it cut to get bailouts – and exit the eurozone.
France’s new president, Francoise Hollande, said during his campaign that he would reopen the fiscal treaty that European governments agreed to in March because it didn’t do enough to promote growth.
And on and on. It is often said that Europe needs tighter political and fiscal integration to save the euro, but there is no political will for that, and likely never will be.
Sovereign governments, it turns out, do not willingly cede their own sovereignty. If the eurozone is to be saved, Europe’s voters will have to save it. Everything they’ve done in the past year suggests that they would rather risk financial disaster than be wedded to countries with mores and politics very different from their own. The reason Europe lacks a lender of last resort is that its citizens don’t want one.
As for us, all we can do is watch and wait and hope for the best.
But don’t be too surprised if Obama calls Angela Merkel someday soon and asks: “How could you let the euro fail? What on earth were you thinking?”