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The attractions of wishful thinking
September 29, 2008
How many lessons do European Union policymakers need before they rid themselves of the illusion that Europe’s economy and financial system are to a considerable extent “decoupled” from those of the US?
In six EU countries - the Benelux trio, Denmark, Germany and the UK - we have seen emergency state intervention over the past few days to rescue or nationalise collapsing banks and mortgage lenders. In each case, the action would not have been necessary had it not been for the financial upheavals in the US.
Yet for most of September, EU finance ministers and other high-ranking officials were at pains to assure us that Europe would be only mildly exposed to any financial contagion emanating from the US.
It wasn’t true then, and it certainly isn’t true now. According to the International monetary Fund, European banks’ aggregate exposure to US subprime mortgages is roughly 73 per cent of the exposure of US banks. Moreover many European banks have become highly leveraged in recent years, leaving themselves with few escape routes when credit conditions tighten and they face unexpected losses and writedowns.
But this is not the first example of European complacency. Last January and February, EU policymakers - such as Jean-Claude Juncker, head of the eurozone’s finance ministers’ group, and Joaquín Almunia, the EU monetary affairs commissioner - loftily dismissed suggestions that Europe’s economy might fall into serious trouble as a result of the US downturn. Europe was more self-sufficient, pursued better balanced policies and was more resilient, was the message.
Less than a year later, the major European economies - France, Germany, Italy, Spain and the UK - are all either in recession or on the brink. Between April and June, the eurozone suffered its first quarter-on-quarter contraction of GDP since the euro’s launch in 1999.
One can sympathise with the yearning of European policymakers to be “decoupled” from the US, in an economic sense. They see it as an affirmation of independence and the basis for a firmer European identity in the future. Some policymakers even seem to speak quite deliberately in terms that put political goals first and economic reality second.
But now reality is hitting the EU hard on the head. The attractions of wishful thinking have never seemed less persuasive.
EU and USA do share some “energy misery and ignorance” :
In the USA, the absurd ” Hedge-Fund Shorters Bail-Out in one weekend and behind closed doors ” is 700 billion dollars , which is the same amount that the USA sends overseas for imported oil and gas each year , so as they say : “…it’s energy independence,you fool…” , and the same basic
failure is in Europa , it’s mathematically impossible to sustain Europa’s standard of living as long as we are not Energy Independent and continue sending out 250 billion euros a year for imported oil and gas ( aprox.) , so what will Brussels do about it ? talk ? complain ? wonder ? cry ? what ? most likely nothing.
Europa , USA ,Japan and Russia could put some good money to work and invest in new ” battery ” technology , like a fuel-cell/battery/solar cell nano-combo-loop to break free ( from patent lawyers and monopolies ) ,and in an “open-source environment” so that all manufacturers and customers can plug-in universally and cut costs and deployment time , but would politicians be realistic and practical and go for it right now ? and patent and monopoly free ? noooo ! they will have multiple conferences, meetings, study groups and research funds, but basically they will hope the Oil-Gas Lobby stays in charge and their political donations in the black, after all, political corruption and incompetence are very rewarding, right?
we must get the young generations to run for office and turn Europa and the USA into the biggest solar, wind and water turbine, hydrogen/methanol fuel-cell, geothermal, seaweed-algae-biofuels, battery-hybrid-electric,fusion and synthetic jet-fuel development center on the planet…if not, mediocrity ,waste and poverty will rule.
Posted by: financialtools1@gmail.com | September 29th, 2008 at 9:09 pm | Report this commentBut there are different degrees.
The greatest exposure to the American financial crisis in Europe is led by the UK and Switzerland both outside of the Eurozone.
UK was the first European nation hit and the consequence was the nationalisation of Bear Stearns months ago.
Then came Alliance & Leicester, which was bought by an Euro Bank (Santander)
And now Bradford & Bingley´s nationalisation, part of it bought by an Eurozone bank (Santander)
Switzerland (UBS) was the second nation afected months ago.
Posted by: Enrique | September 30th, 2008 at 1:15 am | Report this commentSure, Europe is not decoupled from the US. Of any sector the financial sector is the most international and globalised. Many european nations have been suspicious of globalised markets and in the past have called for tighter regulation. In the EU the United Kingdom is the most dependant on smoothly functioning financial markets. Fully 10% of the UK GDP is derived from interbank operations that have now dried up. Of course other countries will be affected. Those countries that believed that outsourcing pensions to the private sector was the way to go will find themselves under increasing pressure as consumers not only feel the pinch of house price falls but also see their retirement savings melt away. Those countries that have, either; not seen a house price boom (Germany),or, high household savings ratios (France, Italy, Spain, Germany, or have a higher percentage of household wealth in bank deposits and government bonds (France, Italy, Spain, Germany) are better shielded from the financial mess that has been unleashed in the US. Households in the UK and the Netherlands, who have up to 60% of household finacial wealth tied up in underfunded pension funds and a large proportion of non-financial assets are “fictitious” house-price increases funded to a large extent from massive borrowing (rather than by savings), will suffer most from the current crisis. Just like banks, households with higher solvancy ratios are likely to better ride out the storm than those with extreme gearing ratios.
Posted by: Stephann | October 1st, 2008 at 9:34 am | Report this comment