Bankers Saved the World From a Euro Meltdown

How Bankers Saved the World From a Euro Meltdown - The Daily Beast:

What happened was nothing less than a Rubicon moment in what was shaping up to be a financial meltdown of global proportions that would have made what happened in the fall of 2008 look tepid.


The reason, of course, is the crisis of the euro zone. And a crisis it is, with every major European leader attesting to just that. In the past two weeks, that crisis went from slow burn to raging fire. You wouldn’t have known that from the mainstream media, but the panic in finance-land was palpable, so much so that I began to wonder if we were at an August 1914 moment, when the world was about to change forever—and not in good ways.

 It was the clear indication that the European Union and the common currency were in peril, and that there is no road map for its dissolution.  The path to creating the euro was complicated enough, but the way out? There is none.


And that is what Europe has been confronting: the end of its bold experiment of economic union. If the euro zone dissolves rapidly, the global economy implodes. Period.  

 

...if the euro zone collapses as an economic union, there is only the yawning unknown and the chaos that would ensue before clarity. The effects would be profoundly disruptive.

An announcement that the largest central banks in the world, including the U.S. Federal Reserve and the European Central Bank, had agreed to reduce the cost of bank borrowing of dollars by half a percent.

The immediate crisis has subsided.

The crisis was unfolding in the world of daily cash flow, an esoteric world of finance, unlike the reviled Wall Street of outlandish profits, that is a global utility pumping trillions of dollars around the world. It provides the daily dose of money that allows billions to do whatever they must do: buy food, gasoline, get their kids to school, go to work, collect government benefits, and so on. The freezing of that system was what so imperiled the global economy after the collapse of Lehman in the fall of 2008, and that was only one large bank. The implosion of Euroland, in the form of depository banks unable to fund themselves and governments unable to tap markets for the cash they need to operate, would have been many orders of magnitude greater.


The world’s largest central banks acting jointly—along with the Chinese central banks easing conditions simultaneously—was a sign of two things: one, the situation was more dire than almost anyone was acknowledging in public, and two, there is a global political determination not to allow that to happen. For the moment, we can use the past tense, because the immediate crisis has subsided.

The core issue is at the heart of the euro paradox: how do you have a common currency with no common economic policy, and how do you prevent rich states from bailing out poorer or more profligate ones? 

Germany has balked at subsidizing the debts of its neighbors, even as its own prosperity depends on those neighbors. So it has refused to allow for common bonds or to give the nod to the European Central Bank to issue more currency. The result has been recession and a gradual freezing of financial activity in Euroland, which in the past weeks went from a slow burn to a rapid deterioration.


Now the Europeans are faced with doing in a crisis: relinquish sovereign control of their economic lives, with Italy and Greece and Spain allowing Germans and French to pass judgment on their budgets and finances, and Germans bowing to the bitter fact that they will have to pay more than their share.

...we live in a deeply interconnected global financial system where the risk of a meltdown remains.



Zachary Karabell is president of River Twice Research and River Twice Capital.
editor for Newsweek/The Daily Beast, he is the coauthor of Sustainable Excellence: The Future of Business in a Fast-Changing World andSuperfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It.