The Reckoning

Euro Crisis: Where This Ends

Demonstrators crowd around the euro logo in front of the European Central Bank (ECB) as they take part in a protest march as part of the 'Occupy Frankfurt' movement in Frankfurt am Main, on October 29, 2011
Demonstrators crowd around the euro logo in front of the European Central Bank (ECB) as they take part in a protest march as part of the ‘Occupy Frankfurt’ movement in Frankfurt am Main, on October 29, 2011.

Photo by DANIEL ROLAND/AFP/Getty Images

The world’s largest economy – think of that phrase for a moment: Ask an American to identify it, and invariably they tell you it is the US economy, with China looming ever larger in the rear view mirror.

This is dead wrong. The world’s largest economy – the most important source of trade, foreign investment and financial activity on the planet – is about to collapse. And in the United States, we still have fools clinging to the notion that, but for a dose of radical Keynesian stimulus or equally radical Hayekian austerity, we would be back to the good old days of the 1990s.

I love my country dearly, but we do have trouble sometimes extracting our heads from our rectums. I suggest all of you who share my blue passport do so immediately and look across the ocean at the disaster looming ahead. No, it’s not the Pacific and China – though long-term our short-sightedness will invite trouble from that quarter, too.

It is Europe – “mother Europe” to some - slave traders or pinko socialists to others. Whatever your cartoon-inspired image of Europe might be, drop it. They still count for a great deal in the world, and the uncontrolled unraveling of the $16.2 trillion a year they created over the past several decades will devastate America.

How could a bunch of medium-sized socialists hurt us, you’re asking? First, look at the numbers. As of the end of 2010, here is the reality with regard to the raw power of each of the largest economies on earth.

World Economy Rankings, in Trillions of US Dollars

EU       16.2

US       14.5

EZ       12.1

China     5.8

Japan     5.4

Germany 3.2

(Rounded numbers, based on IMF and World Bank estimates)

For all the huffing and puffing about the “BRICS” (Brazil, Russia, India and China), the real challenge for the United States is that we remain oblivious to the actual facts of the world. Can anyone remember an intelligent statement from the GOP primary candidates on the potential contagion of a Eurozone collapse? Has the White House sufficiently planned for the tidal wave of economic woe that will head for our shores if the eurozone comes undone? Has anyone explained to you that, as bad as your current 401K balance or home valuation may be now, it will be one third or more worse if Europe comes apart?

I won’t burden you with the details of what is going on in Europe – I’ve written myself silly on the topic over the past two years, and Americans just can’t be bothered to read about the euro zone. Stories about the euro zone, it seems, belong in the same bin as “Canada” or “United Nations” when it comes to the U.S. audience – we just don’t seem to be that interested. (For those who want to repent, read yesterday’s OECD report on the Eurozone crisis).

But, to stay closer to home, some of the rhetorical questions that Americans have been chewing on over the past few years now have some scary answers. What might we have done with the trillions of dollars that we wasted in Iraq or the trillions more recycled back to the highest income earners by the Bush tax cuts?

Well, we might have been able to prevented the downgrade of our sovereign debt rating this summer (another coming soon from Fitch), and we would have been available as a “lender of last resort” when the bond markets threatened to swallow up close allies like Italy. Yes, Italy – 8th largest economy in the world, and more importantly, the canary in the European coal mine. Instead, Italy went begging to the Chinese who, like all fair-weather friends, choose to wait for the clouds to clear up.

So, in spite of the inflated “We’re Number One” flexibility that our economic power should give us, we’re flat broke. We in America lay prostrate awaiting our fate – a fate that, irony of ironies – is in the hands of a German chancellor. So thoroughly did our post-war pacification of Germany succeed that Berlin is incapable of steering the Eurozone that it dominates (and which is the source of its modern power) away from the cliff ahead.

Americans are not quite at the “mattress moment,” the point where our banking system is so risky that to leave our deposits in its ‘safe keeping’ would be foolish. But Europe’s is just a few days away. And even if Americans cannot seem to draw the obvious domestic lessons from the 2008 crisis (radical deregulation kills), they should at least remember this: there’s no such thing as “Over There” anymore. Over there is over here – if their banking system goes down, ours will be sucked into the depths right along with it.

For nation’s closer to the sinking, the time for calm has passed. If you want a truly vivid look at what is happening, read this speech to a German audience by Poland’s savvy foreign minister, Radek Sikorski. “I will probably be the first Polish foreign minister in history to say this, but here it is: I fear German power less than I am beginning to fear its inactivity.”

The ironies never cease.