Europe Is in Bigger Trouble than the U.S.

This is a theme that Simon in particularly has been sounding. Now, according to the Telegraph, a confidential European Commission memo confirms this. To review, the basic problems, relative to the U.S., are:

  • Disproportionately large banking sectors (the Iceland problem) in some countries, such as the U.K.
  • High exposure to U.S.-originated toxic assets (up to 50% of those assets, I have heard estimated).
  • Major exposure to emerging markets, primarily Eastern Europe and secondarily Latin America, which have been harder hit by this crisis than anyone else.
  • Higher pre-crisis national debt levels (for many but not all countries).
  • For countries that use the euro, no control over monetary policy.

On top of these structural problems, there is denial:

The IMF says European and British banks have 75pc as much exposure to US toxic debt as American banks themselves, yet they have been much slower to take their punishment. Write-downs have been $738bn in the US: just $294bn in Europe.

Finally, whatever you want to say about the inevitability of the decline of American hegemony, the U.S. dollar and U.S. Treasury bonds still play a unique role in the global economy, which probably allows us to take on more debt than other countries without crippling our economy through currency depreciation and high interest rates. Or, as Yves Smith puts it, “The nice thing about having the reserve currency is the US isn’t worried about that sort of thing…..yet.”

Originally published at the Baseline Scenario and reproduced here with the author’s permission.

One Response to "Europe Is in Bigger Trouble than the U.S."

  1. JPB   February 20, 2009 at 5:59 am

    I live in Europe and I agree…The smaller the country, the bigger the egos and the less they help others … the perfect recipe for disaster in times like these.In Europe, it is always ‘too little, too late, too much bragging’, it is ridiculous to have so many countries with so many languages, laws and mentalities. It may be rich on a cultural level, but it is an economic nightmare. Belgium has 3 linguistic regions and … they still want to split and become totally independent … Most countries do not like their neighbors, so Europe is only a space on Earth where people use the same currency and can cross borders easily, that’s all.Those are two great things, but in times of crisis, it may well be make the problem harder to solve.Also people are used to too much security coming from the government, many people live on the money they get from the gov and do not even look for a job, so when the money dries up, there will be a revolution and social devastation. People are mentally rusted, they have forgotten how to fight for their life, they will have a really hard time to change their mental game and belief systems.