The announcement by the European Union of a financial rescue package worth $1 trillion to shore up the continent?s calamitously indebted southern rim economies is the largest single bailout ever attempted. It comes as a belated but reassuring signal to world markets that the euro as a currency and the euro zone as a common economic area are determined to survive through concerted fire fighting by member states and interested non-EU actors.
For months, as Greece tottered and the rest of the PIGS countries were being bombarded with downgrades in creditworthiness, inordinate temporising by the EU?s brains trust shook market confidence and raised the costs of borrowing even more steeply for diseased European states. The lackadaisical half measures that Germany, in particular, had advocated in dealing with Greece?s sovereign default crisis and the absence of consensus among EU members over making a decisive financial commitment to the sinking economies amounted to Nero-like fiddling.
Only after it became apparent last week that market sentiment on the euro was entering the hopeless territory and that empty verbal promises of support would not suffice, the EU got its act together and bypassed its own rules to tackle the emergency. If ever there was a crunch time to act and avoid complete collapse of a 60-year-old dream of continental economic unification, it was last Sunday.
Poetically, the marathon negotiations among EU members to hammer out details of obligations and management of the bailout fund, termed a special purpose vehicle, climaxed in Brussels on the 60th anniversary of the Schuman Plan, which had set in motion the concept of European integration for mutual economic benefit. Celebrated as ?Europe Day?, the event provided a nostalgic reminder of Franco-German baby steps in the post-World War II era that culminated in the most successful intergovernmental economic union ever. A project of several generations that had endured and matured through umpteen highs and lows was at stake over the weekend and something had to give.
The most important external moderator who tipped the scales at that delicate moment was the US President Barack Obama. Washington was hoping as early as February that Germany and France would foresee the scary plunge awaiting deeply indebted PIGS economies and declare a concrete bailout with numbers on paper. When nothing but rhetoric emanated from Berlin and Paris as Greece and its peers were on course to become sovereign Lehman Brothers, the Obama administration was reported to be feverishly ?working the phones? and sending envoys to drive sense into the EU?s divided house.
Having come close to systemic destruction in late 2008, the Americans knew that a Europe-wide contagion would spread to global markets and usher in the dreaded ?double dip? across the entire world. The level of exposure of financial centres around the world, including Wall Street, to European debt and the interconnectedness of economic recoveries meant that the US had a lot on the line to defend across the Atlantic. US-EU bilateral trade totals $1 billion a day and investment flows between the two are over $1.8 trillion per annum.
Apart from the immediate objective of preventing more panic stricken bear runs on the Dow Jones average, the ultimate interest Washington was defending, while nudging the EU to wake up, was the capitalist world system itself. Although emerging economies have risen in recent decades to take up responsible positions for sustaining capitalism and its institutional architecture, the US and EU remain the pillars on which a planetary market-based economic system thrives. A ripple effect of credit stagnation from PIGS to Britain and other shaky economies would have imperilled the entire edifice, an outcome that would be supremely detrimental to the business fraternity in the US.
It is with this broader picture in mind that the Obama administration overrode domestic critics and backed the IMF?s $40 billion loan to Greece. While there is no direct aid pouring out of Washington to Athens, the Republican Party was quick to spot the irony that Obama was not ?asking Europe to help bail out indebted US states such as California?. The IMF?s share of the latest $1 trillion European emergency fund is no less than one-third, with the rest being borne by euro zone nations and the European Commission. The extent to which American taxpayers will be burdened yet again to pull Europe out of the grave remains to be seen, but the fact that the IMF is a proxy for the US does show how crucial a hand Washington is playing to save the euro.
Another American aid instrument that was thrown in as EU leaders went into marathon bargaining sessions for the big bailout was the Federal Reserve?s dollar swaps offer, wherein European central banks could exchange euros, whose value was plummeting, for dollars. The Fed coordinated these swaps with counterparts in Japan, Britain, Canada and Switzerland to enable European banks to continue issuing dollar-based loans and avoid a liquidity freeze that would ground European economies to a standstill. The standard bearer states of the capitalist order thus displayed unison, setting aside intra-capitalist rivalries, to occlude a second system-wide crash in less than two years.
When Europe lay prostrate and ripe for communist takeover after World War II, the US designed an economic and technical assistance avalanche of $13 billion via the Marshall Plan (1947-51). That lifeline was extraordinary in scale and unparalleled in effect for forging a resilient capitalist bloc led by the US. The current European bailout is primarily self-funded, but historians will credit Obama for the timely persuasion of EU bigwigs to resort to financial ?overwhelming force? and ?shock and awe? to calm jittery markets.
The author is associate professor of world politics at the OP Jindal Global University