The European Union and European Central Bank stole a play from the wizards in Washington to avert an immediate currency crisis in the EU and the potential ripple effect around the world. Did they do the right thing? For me, the question of addressing the fiscal crisis within the EU is not one of right or wrong; rather, when the crisis comes, how large will it be and how long will it last?
The trillion dollar package provided by the European Central Bank, the European Union itself, and the IMF is a combination of loan guarantees and quantitative easing. Shock and awe and punish those who would dare sell the Euro short, right? Clearly, the massive injection of capital will squeeze those who have shorted the Euro, but what about the long haul?
The EU is subverting the very tenets upon which the union was founded. Those tenets precluded this type of financial bailout. Violation of a moral hazard, perhaps? Straight from the Washington playbook. In fact, reports indicate that President Obama himself called on German Prime Minister Angela Merkel and French Prime Minister Nicolas Sarkozy to compel them to implement this plan. What about rules of law and principles of treaties upon which those investing capital make decisions? The ends obviously justify the means for these political leaders.
The markets will rally today, the shorts will scurry to cover, and the pom-poms will bounce mightily. But has anything really changed? The core of our global economy, and especially the economies of selected nations within the EU, remains gutted by excessive debts. That debt remains. Who will hold the nations within the EU accountable to address these debts?
Who is holding the political powers in Washington accountable? The markets have always been the mechanism to impose the necessary discipline. Markets can be gamed for a while, but ultimately the bills must be paid. Our political leaders have chosen to pay these bills by screwing future generations while kicking the debt can down the road.
The charades and shell games being played out in Washington and now the EU are not averting the inevitable economic pain and underperformance, but only delaying it.
Violating rules and principles of economic treaties and unions comes with a price. The EU and global economy still have to pay that price.