“Europe Risks Another Global Depression”

(9 am. – promoted by ek hornbeck)

While the “news” media focuses on the Tea Party mad hatters and their awesome political clout, there’s another potential financial meltdown in the pipeline.

This report from Baseline Scenario will possibly get move coverage in the coming week, as the markets react. In the meantime I just thought I’d post a quick Essay about it, as a kind of “Heads Up”.  

(BTW, this Essay is strictly a passing along of info, with little comment from me, as IANAE=I am not an economist.)

Here are some snips about the economic crisis in Europe that could eventually spill over into the rest of the world.  

The entirely pointless G7 meeting this weekend only served to underline the fact that Europe is again entering a serious economic crisis.


Following the meeting, US Treasury Secretary Geithner assured reporters that European leaders would handle this crisis “carefully”.

(The discussion involved mainly the Greek debt crisis, but other countries aren’t in great fiscal shape either:  

“..Spain and Portugal.  Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind.)..  

So, what’s the EU doing about this, are they being “careful”?

But the Europeans are not being careful – and it’s not just about Greece any more.  Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal.  Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind.

What are the stronger European countries, specifically Germany and France, doing to contain the self-fulfilling fear that weaker eurozone countries may not be able to pay their debt – this panic that pushes up interest rates and makes it harder for beleaguered governments to actually pay?

The Europeans with deep-pockets are doing nothing – except insist that all countries under pressure cut their budgets quickly and in ways that are probably politically infeasible.  This kind of precipitate fiscal austerity contributed directly to the onset of the Great Depression in the 1930s.

Baseline Scenario’s Simon Johnson goes on to explain how in such situations the International Monetary Fund traditionally steps in to “cushion the blow of crisis”. But he describes the various reasons that the countries in crisis are unlikely to ask for that aid, and the reasons that other IMF member countries may not be willing to authorize their IMF funds to be used.  He summarized this way:

The IMF cannot help in any meaningful way.

So, how will the market react to this, and what’s next?

The financial markets know all this and last week sharpened their swords.  As we move into this week, expect more selling pressure across a wide range of European assets…

…In such a situation, investors scramble for the safest assets available – “cash”, which actually (and ironically, given our budget woes) means short-term US government securities.

The money will go into the US government securities, not because we’re in such great shape, only because at this point in time, we’re in better shape than the European zone countries.

Johnson ends his article by saying that another European style Lehman/AIG could be in pending also, and that the G7 types have already used up most of their “fiscal bullets” to deal with that possible situation.  

Just thought I’d post this to get comments–and insight from some of the more financially and/or economically knowledgable Dharmies.    


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  1. …or maybe it is and the EU will successfully deal with this “carefully”?

  2. I have been aware of the potential for Greece sovereign default for a while. The Johnson article put it in a nice, neat package.

    I have read some articles indicating that the fall of the Euro will create a global depression – others that it will be Japan.  Either way, we are all globally financially interconnected and nothing happens in a vacuum.

    Interestingly enough, I watched Paulson and Greenspan on MTP this morning. There was not one word mentioned about the G7 meeting this weekend.

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