Atlantic Council CEO on a Europe in Crisis: Hoping for the Best, Preparing for the Worst

July 24, 2012

Free Enterprise recently sat down with Fred Kempe, the president and CEO of the Atlantic Council, to discuss Europe’s economic situation.  With recent news of Spain’s bond yields hitting euro-era highs, the timing is apt.  The whole interview is worth reading, as you’re left with a sense of how much Europe lacks strong institutions.  The European Union (EU) is a half-built shell of a house being buffeted by cascading crises. 

If you feel the need for a primer of the crisis afflicting Europe, you’d be hard-pressed to do better than this one from The Economist:

"Just now the euro zone is caught in a dismal downward spiral. Fears about whether the governments in Greece, Portugal, Ireland, Spain and, most alarmingly, Italy will honor their €3 trillion ($4.2 trillion) or so of borrowing are wrecking European banks, which own their debt. Struggling banks undermine confidence and credit. Coming on top of fiscal austerity, this is bringing on recession, deepening fears that governments will be unable to pay back their debts, which further weakens the banks. And so the vice turns, down towards disaster."

The EU’s leaders recognize that the continent’s southern countries need funding from its northern neighbors if they hope to withstand the ongoing credit crunch, yet they lack the mechanisms and means to do so.  Because the EU’s monetary union has grown at a faster clip than its political union, its fiscal policy is left hanging somewhere between Berlin and Athens.  Political structures are being built in fits and starts to catch up with the crisis and provide backing to growing fiscal commitments, but so far they can best be described as “too little, too late.”  A ray of hope came earlier in July with the EU’s summit ending with an agreement to anoint a continental bank supervisor, but its nature and person is still ill-defined. 

This situation stands in marked contrast to the United States, as Kempe notes:

“There is one radical difference between the U.S. and Europe. We have a crisis within an established economic, financial, and political system. They have a crisis without an established financial system. They are trying to build the system within the crisis, and therefore their situation is a much more perilous and existential one than ours is ... Who actually runs Europe? It's caught somewhere between intergovernmental and intragovernmental [governance]. So Europeans are really going through a identity crisis even as they go through an economic and debt crisis.”

The worry is that Europe’s crisis may blow through the continent’s rickety government—brought on by a Greek or Spanish default, perhaps—and lead America’s business and banks to batten down the hatches.  Lending state-side would be especially hard hit, even as interest rates fell as the world’s cash reserves flowed into the safe haven of dollar-denominated assets. 

“If you have a recession in [Europe], you’re going to feel an impact in a lot of different places in the world,” according to Kempe.  “For some American businesses, [the European debt crisis] is going to cost them a significant export market. It could cause the dollar to rise in comparison to the Euro. In general, it could influence nervousness of bankers and those extending credit.”

Watching Europe’s debt crisis sometimes feels like being a bystander to a car crash.  You just can’t look the other way as you watch and wonder what will happen next, hoping for the best but prepared for the worst.