As everyone now recognizes, Europe is in an accelerating death-spiral--collapsing under the weight of its government debt and government spending. An economic collapse--or fundamental restructuring--of Europe is imminent.
The accelerating rate of Europe's collapse is surprising some people, but I'm actually surprised it's taken this long. Eighteen months ago I wrote that events in Europe might cause the Euro to collapse or force the strongest economic powers to abandon it. These conclusions were considered "fringe" just a few months ago, not to mention a year and a half ago.
Now it finally appears to be being fulfilled at breakneck speed.
In the span of just a few months, Greece has required another bailout, instituted a new government, Italy got a new government, Spain got a new government, Italy is reaching bailout-level interest rates, Spain's interest rates are going up dangerously, Portugal's debt has been downgraded to "junk" status, Belgium has been downgraded and is asking for European support, and there is increasing speculation that France is ultimately in trouble. There are assertions that the European Central Bank must take action (i.e. print money) to prevent an Italian death spiral, and must stand ready to "purchase the debt of troubled sovereigns in whatever size proves necessary." Even economic powerhouse Germany had a failed bond auction that has raised concerns about its ability to backstop all of Europe.
At this point it's becoming increasingly clear that Europe will either attempt to resolve its problems by creating a true fiscal union that will crush the sovereignty of member nations, or there will be a spectacular economic disintegration.
Despite the proclamations of politicians trying to calm the markets and saying a Eurozone breakup is impossible, their statements lack credibility. Eurozone banks are preparing for the possibility of a disorderly breakup of the Euro which is increasingly described as "probable" rather than "possible."
Meanwhile, European politicians are now proclaiming that the real problem is that they have monetary union without fiscal union--implying that the solution is fiscal unification. But Europe's problems aren't a result of a lack of fiscal unity but a lack of fiscal responsibility. This will not be solved by unifying their fiscal irresponsibility.
The European Union--as it is currently instituted--is doomed. Whether it collapses now or they succeed at kicking the can down the road a little longer, this will not be a minor economic event.
As stated above, one of the possible "solutions" being offered is a tighter economic union and "pooling" the debt of all European countries into a consolidated continent-wide debt raised by some kind of "Eurobonds." This isn't really a solution since it just redistributes the debt of Greece, Italy, Spain, etc. to the stronger countries such as Germany. Germany is resistant to this idea, understandably.
If Germany foolishly accepts liability for the debt of other countries, eventually their own credit situation will suffer and their interest rates will rise just as they have in the problem countries. Nothing can be gained by such a course of action but time. But is Germany willing to tie itself to this economic disaster and go down with the sinking ship that is the Euro?
Even if they do, Europe will at some point require external support. Given the fact that interest rates in Europe are soaring while interest rates in the United States are at record lows, it seems likely that Europe and the world will eventually look to the United States and the Federal Reserve to backstop Europe.
Of course, we can't afford it. Given our own unsustainable $15 trillion debt, we can't afford to borrow enough money to loan to Europe--and if we did, our borrowing costs would immediately go up and we'd see failed bond auctions just like Germany.
Likewise, the Federal Reserve can't print enough dollars to bail out all of Europe without turning the dollar into Monopoly money. Loan guarantees by the U.S. or the Federal Reserve would ultimately be just as unfeasible as investors would see those actions as an increased liability and risk on the part of the U.S. Government or Federal Reserve.
Nevertheless, I believe that eventually we will see calls for the U.S. and the Federal Reserve to bailout Europe. After some wrangling this option will be rejected but, during the uncertainty, U.S. interest rates will start spiking due to fears that we can't even support our own debt let alone help Europe (and possibly a fear that we might be stupid enough to try to bailout Europe).
When that happens, we may very well see an appeal to pool the debt of Europe and the United States together into a joint liability spanning our two continents. Just as some think Europe should "unite" its debt into continent-wide obligations, it's very possible that we'll see recommendations that this be taken to the trans-Atlantic level of "uniting" the debts of Europe and the United States.
What happens then probably depends on when it happens and who is president of the United States. I wouldn't be surprised to see Obama support such a "merger" while I'd hope a Republican president would be less likely to entertain that option.
Given the accelerating pace of economic deterioration in Europe, it seems likely that Europe will collapse and create huge waves in the world economy before the elections. Republican candidates for president better be ready with a confident and credible plan on what to do in response to Europe's collapse and the likely requests for economic support that we'll be receiving from Europe and the world.
And if the Republican nominee wants to win, his or her answers better be fundamentally different than Obama's.