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Wilson Center Newsletter November 2011
Europe's Slow Motion Car Crash
Marshall Manson '96 - is Managing Director of Digital for Europe, the Middle East and Africa at Edelman, the world's largest independent communications company.
I have lived in London now for nearly four years, so I had a front row seat as the City of London, Europe's leading financial center, collapsed in the autumn of 2008. The bankruptcy of Lehman Brothers and the resulting economic disintegration had a feeling of suddenness akin to an Aston Martin DB9 smashing itself into a concrete barrier at full speed. My responsibilities now extend to Europe, the Middle East and Africa, so in addition to building up countless airline miles, I spend time visiting with clients and colleagues all over the region. All of this has left me with a very different impression about the current crisis. There has been nothing sudden about this one. It has been much more like watching a Ferrari roll slowly off a cliff.This crisis has building in the markets and the capitals of Europe since at least a year ago, when it became apparent that the Irish government was in danger of defaulting on its debts as a result of having to bail out its banks thanks to their exposure to American mortgage investments. So Europe got together and bailed out Ireland. Then they bailed out Portugal. And then Greece -- twice. But the biggest fear has always been that the markets' anxiety about Irish, Portuguese or Greek default would cause similar worries about a much larger economy. Spain was the primary focus of that angst for most of the last year. But Italy was always the worst-case scenario. Italy, the world's eighth largest economy and third largest bond market, was viewed as too big to save. After a year of political dithering, the day of reckoning seems to have arrived for Italy. As of this writing, Italian bond yields had crested north of 7 percent, prompting fears of a death spiral toward inevitable default. The Italian parliament had passed a set of austerity measures designed to reassure bond markets that the Italian government wasn't populated with solely irresponsible officials. As further proof, they finally managed to push out their chief official in charge, Silvio Berlusconi. Sadly, Europe has been ignoring the warning signs on Italy for months. For example, in July, while passing time in an airport lounge, I vividly remember reading a report in the Economist [http://www.economist.com/blogs/schumpeter/2011/07/italys-finances] about how Italy's Finance Minister, Giulio Tremonti, had been implicated on the periphery of one of Italy's many political scandals. Tremonti is widely regarded as one of the few trustworthy grown ups in the Berlusconi government, and the mere threat of his departure caused a massive spike in Italian bond yields which almost precipitated a crisis. Through countless crises and innumerable emergency summits, Europe's political leadership and official financial institutions have proven incapable of finding a solution. Their dithering has exposed huge problems with the European experiment, and now, the future of the Euro and Europe's multi-national institutions is rightly being questioned. Major changes to the structure of the EU, the European Central Bank, and the Euro facility are almost sure to be on the table in the coming months. The lack of a unified fiscal policy for the Euro zone and the unwillingness of the ECB to act as lender of last resort to nearly insolvent Euro countries have been particularly significant failings. The consequences of the crises in Europe will be felt around the world for a long time to come. Europe's 350 million consumers drive demand for the world's products and European companies still account for a massive share of the world's industrial production. The failure of European bond markets will put pressure on the global banking system, but will be especially impactful in the U.S., where many large investors fleeing mortgage securities and equities moved into government bonds. Perhaps most importantly, the current crisis has revealed huge gaps between electorates and elected officials in almost every country in Europe. Earlier this week, a group of German bankers - who should know better - told a friend of mine that they thought German support for Greek bailouts had gone too far and that they would never support a German-led bail out of Italy. In Italy, Berlusconi's resignation may lead to early elections, which could cause further financial chaos because Italian voters are overwhelmingly opposed to many of the policies that international players are insisting on. In Greece, a new national unity government will make the parliamentary politics of austerity smoother, but will not do anything to reduce protests in the streets. The common theme across Europe these days is anger. And from my perspective, that's entirely understandable. Europe's politicians have failed repeatedly to make hard decisions, and the world will be paying the price for a long time. But for all of that, the mess in Europe has one potential upside for Americans: The weakness of the Euro against the dollar means that now is a particularly wonderful time to visit Europe.