One of the biggest factors that affect American recovery is out of control of either presidential candidate: The ongoing crisis in the eurozone. In fact, it is worsening.
I know, after two years of trouble and diddling — and yet life went on — the euro mess sounds like the boy who cried wolf. Yet at the end of the tale, a real wolf showed up. And in the eurozone’s case, the wolf has been munching on the periphery for some time. Greece was just the appetizer.
The zone’s purchasing manager’s index fell again in July. It was already in contraction territory. Worse, the contagion has spread to Germany, whose index fell to a three-year low. The meme is that now, finally, the European Central Bank will step up and use the bazooka. As important is the permanent euro bailout fund, which has been mired in German courts.
Neither may be enough. Spaniards, for example, are moving money out of Spanish banks to safer havens and even resorting to barter. A Lehman moment has been gathering, where banks don’t trust each other in the vital overnight credit markets. Those companies that can are not preparing scenarios not just for a messy Greek exit but a breakup of the currency union.
In the United States, Washington moved swiftly, if controversially and with missteps, to backstop the financial system with the Federal Reserve as lender of last resort, infuse liquidity with TARP and embark on a stimulus. Trillions were needed and prevented depression. Europe has done none of this, especially not the “swiftly” part. The ECB is not a true lender of last resort. The measures taken have been small and incremental, which have done nothing to address debt and have succeeded in bringing on recession.
It’s tempting to write that we have finally reached the critical moment. Yet it may have passed a year ago or more. The wolf is at the door and he won’t stop with the eurozone.
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Today’s Econ Haiku:
I built this haiku
But the trolls will make it ours