We’re at the end of “extend and pretend.” The crisis of the Eurozone is now acute. The headlines are specific. The best analysis suggests that only extraordinary action can keep it afloat. And even that would work only to delay the inevitable for a month or two more. The reality is that the Eurozone no longer offers any good option for continued unity. As an Italian policy-maker told Martin Wolf of the Financial Times, “it would be better to leave (the eurozone) than endure 30 years of pain.”
At the centre of the storm sits German Chancellor Angela Merkel, who is being told by one and all that she must take extraordinary action to save the day. But the truth is she doesn’t have the authority to do so, doesn’t have the votes, doesn’t have the political throw-weight to over-ride the judicial, legislative and political vetoes. She won’t save the day because she can’t.
So what does she do?
In the days leading up to the collapse of Lehman Brothers, then French Finance Minister (now IMF Managing Director) Chistine Lagarde told then-Treasury Secretary Hank Paulson that he could not allow Lehman to fail. The ramifications would be catastrophic, she said. She was mostly right.
Three years later, it will be Angela Merkel talking to President Obama,Treasury Secretary Geithner and Federal Reserve Bank Chairman Ben Bernanke with exactly the same message. The United States government and the Federal Reserve must come to the rescue of the Eurozone or the ramifications will be catastrophic. And she will say that she needs roughly $1 trillion in financial guarantees and liquidity support. That’s the number that will calm the markets.
She will do this publicly (it will be leaked to the FT or the NYT) because (a) she wants to maximise the pressure on the US to ride to the rescue and (b) she wants the blame to fall elsewhere in the event that the “situation” goes haywire.
And there will follow perhaps the defining moment of the Obama Presidency. If Obama goes forward and provides all or part of the $1 trillion guarantee, he will likely cut his own political throat in so doing. If Obama declines to go forward and provide all or part of the $1 trillion guarantee, he will likely preside over the second massively destabilizing financial panic in four years, thus insuring a second Great Recession, thus cutting his own political throat.
Sometimes, the choice a president has to make is between really, really bad and truly awful. That’s the choice that Angela Merkel will likely drop on President Obama’s desk within the next month, and probably sooner rather than later.
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