EU countries mired in debt are getting help from an unlikely source: China. The ascendant superpower is buying up large amounts of European bonds and investing heavily in euro zone countries. Moreover, there is talk of a reversal of the long standing EU arms embargo on China. Is this all a coincidence?
Kurt Volker, a former U.S. ambassador to NATO and now managing director at Center for Transatlantic Relations at Johns Hopkins University commented: "If all this were to play out - that is, lifting the embargo, subsequent sanctions, etc. - it would bea new low point in U.S.-E.U. relations." (HT: NATO Source)
I agree. I hope the EU does not lift the arms embargo. In my opinion NATO countries should not sell any arms to non-NATO members.
Conventional wisdom used to be that Europeans envy the rich, while Americans hope to emulate them. Now, Americans are increasingly concerned about rising inequality and the influence of the tiny elite of the super rich.
Plutocracy is a very popular topic of discussion in the US media at the moment. I am quite surprised.
It can't be a coincidence that even mainstream and center-right publications like Foreign Affairs, The American Interest and The Atlantic write about it extensively right now:
Sixteen months ago, I began to grow worried about Greece's debt problems and its implications for the euro. At the time, I wrote,
The euro area has yet to demonstrate its cohesiveness when confronted with the growing economic divergence of its member states and even the specter of a sovereign debt default....Leaders will have to act together to show their commitment to preserving the single monetary policy in the euro area.
Yesterday, EU leaders rose to the challenge and solidified the euro's position in world monetary affairs. The announced $1 trillion package does more than provide indebted countries with a source of funds during periods of crisis; it demonstrates the commitment of leaders to the concept of European integration. In so doing, European officials have significantly increased the credibility of the EU in the eyes of their American counterparts and taken the first step towards some degree of fiscal integration.
A few details of the announced aid package are particularly noteworthy:
"What's Christmas time...but a time for paying bills without money?" - Ebeneezer Scrooge in A Christmas Carol by Charles Dickens
The European Central Bank has no plans to bail out Greece if it encounters difficulty in meeting its debt obligations. According to the Wall Street Journal Bank member Ewald Nowotny said, "One has to be very clear: The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances." In other words, "if the poor would rather die, they had better do it, and decrease the surplus population."
The bank's reasoning is understandable: a blanket guarantee to underwrite sovereign debt throughout Europe would create an untenable moral hazard. And the bank likely does not have the legal foundation to "bail out" a sovereign country. But Greece has gone through a spate of bad news: First, Fitch and then S&P downgraded Greece's credit rating to BBB+. Moody remains the only rating agency to give the country an A1 grade, but it has the country on a negative watch. They would certainly have appreciated some good tidings.
Goldman Sachs analyst Erik Nielsen notes how this news creates a strange situation for the bank and for Europe (from Bloomberg News):
This is a bizarre and ultimately untenable situation for the ECB....The unthinkable -- that the ECB would not accept sovereign securities form a member as collateral -- has become a measurable risk, and one exclusively controlled by Moody's....Moody's is now the de facto decision maker on Greek eligibility.
A European institution (the ECB) refuses to entertain the idea of helping Greece, and so everything rests on an American company (Moody's). Merry Christmas Greece? Bah humbug!
Changes are afoot in the tight-knit world of transatlantic central banking. The problem is, central bankers and the markets that follow their every word hate change.
In the US, Fed Chairman Ben Bernanke underwent his renomination hearings in Congress last week. The public grilling and aggressive questioning surprised some and spooked investors who feared they signaled the beginning of Congressional meddling with monetary policy.
Meanwhile, EurActiv reports that Italy is refusing to support the renomination of Jean-Claude Juncker, the ever-present Luxembourg Prime Minister, as president of the Eurogroup. The position coordinates the central bank activities of countries using the Euro, and Italian resistance may cause further problems when countries decide on a new president for the European Central Bank. In the complex wrangling of EU politics, each country seeks to have its fair share of prestigious posts. Italy feels left out from the recent appointments in the European Parliament and European Council and seems to see the Eurogroup or even ECB as a consolation prize. Though such a compromise may appease EU players, it would likely upset financial markets unaccustomed to politicized central banking.
All of this uncertainty in central bank leadership in Europe and the US is not helpful. The extraordinary intervention by central bankers during the past two years was only the first half of the plan. Arguably, the trickier part will be for central banks to divest their positions and resume their normal responsibility as interest rates nudgers. Wrangling about leadership, particularly while countries like Italy and Greece struggle with enormous burdens of debt, will only be a dangerous distraction.
President Bush cited an influx of foreign money into the United States as one of the root causes of the tight credit market and urged European and Asian policy makers to follow the US plan of large-scale bailouts of the financial system. This call was generally rebuffed. German Finance Minister Peer Steinbrück described the financial market crisis as "above all an American problem."
Steinbrück predicted that "the US will lose its status as the superpower of the world financial system." Instead European banks and sovereign wealth funds will have an increased role in a multipolar financial world.
The New York Times concludes from these transatlantic disagreements that "Trans-Atlantic sniping over the global financial crisis intensified." Wow, that's harsh words. Real snipers kill. If someone just disagrees with you, he does not kill you. You just gets a slight dent in your bloated ego. Apparently some people can't stand having folks on the other side of the Atlantic disagree with them. Pride goes before a fall (Hochmut kommt vor dem Fall) and sometimes even after the fall. Well, perhaps the NYT is just trying to sell more copies and more ads...
The article is discussed on my other site "Atlantic Community." We also present several expert opinions on the bailout plan and reform of the financial system and ask our members and all of you: How to Respond to the Financial Crisis?
Conventional wisdom used to be that Europeans envy the rich, while Americans hope to emulate them. Now, Americans are increasingly concerned about rising inequality and the influence of the tiny elite of the super rich.