Imagine struggling mightily with your own finances (easy to do, given today’s economy) while your obnoxious cousin, who is struggling with his own financial issues, tells you just to take out another credit card. Your only reasonable response is likely to be, “Shut up and fix your own problems.”
That is basically what the German finance minister told America’s own Treasury secretary, Timothy Geithner, when he called Geithner’s advice for expanding Europe’s bailout fund “stupid.”
There are three aspects to this exchange worth noting. First, Geithner reaffirmed the impression many Europeans have of the brassy, clueless American. Europe doesn’t need lectures from the American government at this point. Europe is about to go through an enormously painful episode. Any advice the American government might offer should be responsive in nature — and largely private. In short, have a little class, fella.
Second, consider America’s situation today: a very high unemployment rate (over 9 percent); the now-proven complete failure of President Obama’s stimulus policies, which Geithner helped design and defend (stagnant economic growth); our own rapidly rising public debt (approaching 70 percent of our economy); and the mounting possibility of yet another recession. Against the backdrop of such a dismal record, on what grounds does Geithner lecture anyone? Is President Obama looking to blame the Europeans for America’s troubles? Was the secretary looking to set up Europe as the fall guy to reelect the president?
The third aspect speaks to the heart of the Geithner proposal. In brief, Europe has agreed to establish a €440 billion bailout fund called the European Financial Stability Facility (EFSF). The trouble is that the EFSF may be too small to deal with the wave of troubles breaking in the form of failing banks great and small. Many in Europe want to just skip the formalities and supplement the EFSF with Eurobonds, similar to U.S. Treasury bonds, to be issued by some supranational organization like the European Union in Brussels or even the European Investment Bank in Luxembourg.
The advantage of a Eurobond is that Europe’s elites could then raise vast sums to solve their immediate problems with little or no pain for the struggling countries like Greece and Portugal. The disadvantage for the strong countries like Germany and the Netherlands is that it would effectively turn Germany’s public finances over to unelected Brusselcrats. Long story short, this is not going to happen any time soon, if ever.
So Secretary Geithner proposed an end-run around Germany’s inconvenient obstinate opposition to the Eurobond. Geithner proposed leveraging the €440 billion in the EFSF, possibly through the European Central Bank. Translation: Leverage means to take on debt, so Geithner’s plan is to solve the debt problems of some of Europe’s weakest countries by taking on a lot more debt through some Europe-wide institution. Rather than create a Eurobond, Geithner was effectively and explicitly proposing that the central bank become an agent of supranational fiscal policy acting on behalf of the Brusselcrats.
As a matter of financial engineering, Geithner’s plan shows creativity. As a matter of European politics, it shows incredible naïveté. Did he really think the German people wouldn’t notice? This is the kind of idea that should have been floated privately, and then, when the Germans stopped laughing, they would just shake their heads and move on. And America would have been spared yet another public embarrassment at the hands of its own.
— J. D. Foster is Norman B. Ture Senior Fellow at the Heritage Foundation.