Europe Peein’

We’ve drilled down in recent blogs noting riots across parts of Europe, particularly where economic pain is greatest, and the collapse of economies like those in Iceland and Latvia, as well as the significant drop in economic stability of European household names like Spain, Ireland, Portugal, Greece, Italy and Ireland. While France and Germany feel the contraction, and England (as financial capital) is taking it on the chin, the real threat of collapse, one that threatens the very existence of the European Union and the operation of the Central Bank, perhaps even the fall of the Euro as a currency (a risk according to Bloomberg), is the general precipitous collapse of the eastern European nations.

A tiny and underwhelming solution to some of these banking woes has been a pledge by European Bank for Reconstruction and Development, the World Bank and the European Investment bank to provide up to 24.5 billion euros [almost $31 billion] to aid central and eastern European banks. But this is a drop in the bucket.

As these eastern European nations emerged from the dark ages of communism, their need to enter the 20^th and now 21^st century required a new financial system, massive investment and construction – and massive lending. The citizens of these nations barely qualified as “consumers” when the Berlin Wall fell almost two decades ago, but they rapidly discovered the use of credit to begin to “catch up” with the Western lifestyle. This money came mostly from the financial institutions from the rest of Western Europe, and as the European Union grew to include an increasing number of these Eastern bloc nations, the financial support of the EU’s Central Bank became their central resource too.

But we all know what rapid and vast overleveraging can produce. In Europe, some are calling the Western European nations’ support of Eastern European growth through debt as Europe’s “subprime crisis.” Which means that failing European financial institutions and frozen credit is due to a whole lot more than more than just greedy banks’ buying toxic American derivatives. Whether you call it “folly,” “humanistic,” “greed,” or some malevolent combination of these variables, Houston… er… Paris/Berlin/London… we have a problem.

The February 27^th theDeal.com: “Writing on vox.eu on [February 26^th], Daniel Gros of the Centre for European policy studies had this to say: ‘The EU should set up a massive European Financial Stability Fund (EFSF). Given the scale of the problem facing European banks, the fund would probably have to be of substantial scale, involving about 5% of EU GDP or around €500-700 billion [$630-$882 billion].’… And on [February 25^th], former IMF chief economist Simon Johnson reiterated a proposal he made in October. He wants a European Stability Fund that is able to offer a 2 trillion euro credit line. Johnson also argued for action sooner rather than later.”

In-fighting, nascent intra-European protectionism (particularly in the automobile industry) and the vast schism of short and long-term financial interests between the “haves” (particularly France and Germany) and the “have-nots” (the nations noted above and particularly the Eastern bloc of EU nations), make what is at stake more than the stability of the euro; it is the survival of the European Union itself.

I’m Peter Dekom, and I thought you might like to know it’s not all our fault.