Obama and the European Union’s Growing Financial Crisis

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Since the 911 attacks in 2001, Afghanistan, Iraq, Iran and the “war against terrorism” have defined the challenge of U.S. foreign policy and the burden of policing American empire. But the collapse of Wall Street banking houses has seized-up markets across Europe and propelled the continent into the maelstrom of capitalism’s global crisis. Thus, the Obama administration is now confronted with a far reaching foreign policy challenge. The severity of Europe’s financial dilemma was underscored by British Prime Minister Gordon Brown’s early March visit to Washington D.C. in which he called on President Obama to articulate a “Global New Deal” to staunch the international financial meltdown. Absent Sir Gordon’s Shakespearean theatrics that evoked memories of a New Deal-Marshall Plan, what’s at stake is the survival of Europe’s most significant achievement of the past 30 years – the establishment of the single market and currency, and the integration of Europe’s two halves after the demise of the Soviet Union.

For an Obama Administration beset by America’s deepest economic downturn since the Great Depression, Europe’s faltering economies carry the risk of destabilization across the continent and the potential to aggravate America’s recovery. Obama is in no position to bemoan European leader’s reluctance to address their bank’s toxic assets and adoption of modest stimulus packages. Indeed, Obama has dodged the issue of shutting down failing U.S. banks and ferreting out billions in bad paper the banks continue to hold. Moreover, he has not pursuaded U.S. banks to resume commercial lending. Nevertheless, when the President attends the G-20 Summit in London on April 2 and addresses the European Union in Prague three days later, he will be expected to provide leadership and tangible proposals if he is to gain European acceptance of America’s global leadership role.

President Obama’s task may be more difficult now that German Chancellor Angela Merkel has united with French President Nicolas Sarkozy in rejecting Gordon Brown’s call for a “global stimulus package” to steer the world out of recession. The Obama administration has been pushing for Europe to do more on stimulus. At a G-20 planning session of finance ministers and banking governors held in Sussex, England, Merkel said it was too early to determine the effects of the first multi-billion dollar stimulus package; suggesting that consideration of a second stimulus package was pre-mature and irresponsible. Without specifying any committments, Merkel said EU members will pump more funds into the International Monetary Fund to rescue stuggling nations and highlighted the need for tougher regulation on banking hedge funds.

Among the traditional western members of the EU, the discourse concerning the best path to stem the financial crisis has been intense and sometimes quite divisive. Much of the debate has centered on the role of stimulus and spending, where opposing camps have emerged. With the largest economy in Europe Germany has and is expected to spend more than other countries. However, Chancellor Angela Merkel has consistently opposed Europe attempting to spend its way out of the crisis. Having already spent 4.2 percent of its GDP on economic stimulus, Merkel insist Germany is in the vanguard of fighting for economic recovery. Chaffing under the possibility that big spending will lead to an explosion of debt and rising inflation, Merkel has strung together a coalition of fiscally conservative smaller nations that includes Sweden, Finland, Denmark, the Netherlands and Luxembourg.

Merkel’s French counterpart, President Sarkozy, has been the proponent of more protectionist policies and has enjoyed the support of Ireland, Greece, Italy, Spain and Portugal – all members of the euro zone and all posting extraordinarily high debts. As a supporter of bigger spending programs in Europe, Sarkozy has often been at odds with Merkel, but sided with the Chancellor in opposing Gordon Brown’s proposed global stimulus package.

Confronted with the uncertainties of the market and dubious about the potential success of America’s economic stimulus plan, increasingly nationalist inclinations are surfacing within the EU that are undermining the fabric of the EU’s integrated single economy. Financial panic and sharp divisions within the 27 member European Union are deepening. The economies of the fifteen Euro-currency zone nations like Greece and Ireland are hemorrhaging. When eight Eastern and Central European EU countries outside the currency zone united behind Hungarian Prime Minister Ferenc Gyurcsany’s call for establishing a 190 billion EU fund to restore solvency to their states, Prime Minister Angela Merkel quickly rejected the proposal. Merkel also dismissed another plan to expedite some of these countries’ ascension into the Euro-currency zone. Merkel said Germany would not support a blanket bailout and that aid for each country should be decided on a case-by-case basis. That sounds prudent, but the slow dribble of funds doled out to each country may lack the financial punch needed to deliver these countries from the crisis. In response, Prime Minister Gyurcsany told reporters “We should not allow that a new Iron Curtain should be set up and divide Europe.” Oh really. Surely this was music to Moscow’s ears.

Outside the EU the fate of Ukraine looms large. It stands on the brink of financial default. Although it is a non-EU member state, Ukraine has emerged as a strategic defense and energy battleground between Europe and Russia. Like the fall of any Eastern European nation Ukraine’s default could unleash a domino effect of collapsing other EU countries. Banks in Austria, Italy and Sweden are heavily invested in Eastern Europe, and would see the value of their assets plummet quickly if one of these states goes belly up. The eight Eastern states are Poland, Slovakia, Czech Republic, Bulgaria, Romania and the three Baltic states.

So what will happen when President Obama goes to Europe in two weeks? Not much. President Obama will certainly remind Europe that it has the largest collective economy in the world, and that to save it will require bold action. If Europe were to fall deeper into recession it would have severe implications for America’s economic recovery and could push the U.S. deeper into recession. He will assure Europe that America remains committed to free trade over protectionism. Leaving aside Gordon Brown’s utopian idea of a “Global New Deal”, Obama will pledge America’s support for more stringent international banking regulations regarding transparency, overleveraging and derivative instruments. And President Obama will pledge America’s support for coordinated “recovery assistance” plans with the IMF and the World Bank for European nations staring into the abyss of financial default. In short, President Obama will have little to offer.

At the end of the day, Europe’s leaders must reach consensus on a short term plan on how to financially process its troubled Eastern European states and Ukraine. Prime Minister Merkel’s faction must also be prepared to compromise on spending. Although she has won the argument on rejecting a second stimulus package, the price Europe must pay to extricate itself from the present crisis cannot be purchased on the cheap. If anything can and should unite Europe’s leaders, it is the specter of Russia hovering over Eastern Europe ready to pounce on any opportunity to bring its former Warsaw Pact allies back into Moscow’s orbit. For the moment EU enlargement is off the table. Europe has a crisis it must attend to or the EU as we know it, will be no more.

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2 thoughts on “Obama and the European Union’s Growing Financial Crisis

    • Reimposition of the Iron Curtain suggests that the Eastern European countries that joined the EU may have fared better by remaining in the Russian dominated Commonwealth of Independent States (CIS).

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