Desperate to contain a growing sovereign debt crisis in the Eurozone, G20 finance ministers proposed steps to control mushrooming debt. Once considered the gold standard, the euro, first launched in 1999, rapidly replaced the U.S. dollar as the world’s most stable currency. Concerns about sovereign debt and liquidity problems in European banks sparked new fears about a Greek default, leaving the Dow Jones Industrials with a 6.4% decline for the week ending Sept. 22. With so many funds intertwined globally, problems in the Eurozone impact stock exchanges around the globe, especially Wall Street. U.S. Treasury Secretary Timothy Geithner told International Monetary Fund officials in Washington that the U.S. would do whatever it could to prevent a Eurozone meltdown. Geithner urged the European Central Bank to supply more cash to European banks.
Fears of a Greek default grew louder when Greek Finance Minister Evangelos Venizelos admitted that Greece could indeed default on loans to European banks. Without emergency funding by the ECB, the Eurozone faces an economic meltdown of historic proportions, far worse that the crisis that swept the U.S. banking industry in 2008. France and Germany have large exposures to Greek debt, prompting worries about liquidity problems in Eurozone banks. “The threat of cascading default, bank runs and catastrophic risk must be taken off the table,” said Geithner, urging the ECB to set up a $1 trillion-plus euro emergency fund. “Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets, even worse.” Canada’s central bank head Mark Carney urged the ECB to invest at least $1 trillion euros [$1.35 trillion U.S.] to assure banking reserves.
Newly minted IMF President Christine Lagarde urged more coordination with central banks to stave off a Eurozone economic meltdown. While the IMF controls lending practices to 187 developing countries, they can’t print their own currency to re-supply European banks. “Today, we agree to act decisively to tackle the dangers confronting the global economy,” said Lagarde, who only recently took over the IMF from its disgraced President Dominique Strauss-Kahn. Kahn had once supported the ideal of giving the IMF coinage rights, creating a new reserve currency. With the IMF begging for cash from the U.S. Fed and ECB, they’re in no position to solve cash shortages in Eurozone banks. ECB requires 17-Eurozone members to have strict debt requirements. Proposed austerity measure in Greece caused rioting in Athen’s streets to secure new ECB bailouts.
Prospects of a default in Greece rattled global stock markets, taking the Dow down 6.4% last week. Treasury Secretary Tim Geither lead the charge at the Washington IMF meeting, urging the ECB to take more aggressive steps in supplying low interest rate loans to countries in need of financial help. Because the 17-member Eurozone share no common tax base like in the U.S., Geither recommended the ECB create a trillion-plus euro emergency fund to keep financially strapped countries afloat. More affluent Eurozone countries, like Germany and France, will have to bear the brunt of the debt to save financially troubled economies. While there’s some resistance in Germany to pulling the weight for less stable Eurozone countries, German Chancellor Angela Merkel won a key vote in Germany’s High Court to incur greater national debt. Calming world markets is the Eurozone’s top priority.
Looking at the big picture, the Eurozone is in crisis mode, trying to reassure world markets—especially Wall Street—that the euro will survive the sovereign debt crisis. Without the ability to print money and devalue currencies, individual Eurozone countries must defer the ECB for cash. Apart from worries about Greek debt, growing worries about big Eurozone banks running out of cash also fuel the current economic crisis. Without a common Eurozone tax base, the ECB must create an emergency fund to carry more financially strapped economies before a global economic recovery kicks in. Slow growth rates in the U.S. and Eurozone directly impact Asian economies, especially China, where much of the world’s manufacturing takes place. Less demand from the West slows down Asian growth. Western economies must find ways to relocate manufacturing and assembly back on their own soil. Sending U.S. and Eurozone jobs overseas actually hurt the global economy.
Growth rates in the U.S. and Europe can only improve by fueling the employment situation domestically. Cheap foreign manufacturing has its place but ultimately backfires on publicly traded companies by robbing domestic economies of enough employment to fuel consumer spending. Without employed and cash-rich consumers, growth rates remain sluggish. Gross Domestic Product depends heavily on consumer spending, something that happens with expanded employment. Cash strapped governments in the U.S. and overseas rely on employment to fill governments’ coffers. “It’s implementation first and foremost,” Lagarde told the press, referring to the Eurozone’s new emergency bailout fund. “No qualification,” demonstrating the Eurozone’s commitment to solving its debt and cash crisis. Beyond the emergency fund, employment remains key.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.