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.”

Update: Arnold Kling linked here, and added this great comment:

It’s been years since I read Steve Roach describe the United States as the “tallest pygmy” in world currency markets, and it’s a metaphor that just seems to always apply.

19 responses to “Europe Is in Bigger Trouble than the U.S.

  1. Eastern Europe hit harder than elsewhere???

    Well, Poland for one is still growing, albeit at a slower pace, unlike a lot of Western Europe which is in recession.

    Polish banks faced strict regulation so there was very little in terms of exposure to toxic US assets.

    Credit to the private sector is still growing in Poland.

    The Polish currency depreciated vs the Euro providing a very useful stimulus to local exporters, which is not available to the Eurozone.

    Yes a slow down is coming. But Poland has been much less hit by the current crisis than Western Europe, or the US for that matter…

  2. Mark A. Sadowski

    Pawel D.,

    I’m of Polish descent. Fortunately my cousins (yes, I keep in touch) have more wealth than debt. But much of Polish mortgage debt was evaluated in foreign currency. I agree that the global financial crises has not affected Poland so far as much as its neighbors. But this is not likely to last.

    Furthermore, have you noticed the implosion in the Baltic States and in Hungary?

  3. Trust me, if things go worse and worse to the end, Euro will survive but US won’t.

    The depression of economy will certainly bring two things: repellence to immigration and trade protection.

    This is fine for any other traditional country, being conventional may decrease a country’s development however could be a safe way for dormancy in winter. But US is an immigration country, a trade country. Repellence to immigration and trade protection are taking the base away from this country.

    The most dangerous signal to US is not the 5000 of DOW, not the bankruptcy of Citi, not the record-hit job loss percentage. It is the claim that “buy American, hire American”.

    When most American claim this, this country will definitely see no future.

  4. Mark A. Sadowski: “But much of Polish mortgage debt was evaluated in foreign currency. I agree that the global financial crises has not affected Poland so far as much as its neighbors. But this is not likely to last.”

    Mark: Yes, foreign currency lending to households has been permitted(!) and significant. However, despite a c.a. 40% currency depreciation thus far there has not been any noticeable increase in household defaults…

    Hungary and Latvia and Lithuania were in a much more precarious situation to begin with. Check out to get more details in English: http://www.rgemonitor.com/euro-monitor/255488/eastern_europe_on_crisis_watch

  5. “For countries that use the euro, no control over monetary policy.”
    Another way to think about that last point is that the Eurozone is like the US or Canada would be, if there were no Federal government, and only state/provincial governments.

    I made that argument here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/01/canada-and-the-eurozone-a-comparison.html

  6. You said “…Latin America, which have been harder hit by this crisis than anyone else.”

    I agreed with you about E. Europe, but not sure if Lat Am has been “harder hit than anyone else”.

    Sure, Mexico has worrying signals, but having hedged oil futures, and with reserve stockpiles, they should be ok through 2009. Brazil is doing fine, so far (relatively speaking), with its stock market actually up so far this year.

    Argentina may be a mess, but those trouble existed way before the onslaught of the credit crisis. And, while nationalization of the pension system was not popular, it probably pushed back talk of default till 2010+.

    Ecuador defaulted, but chose to do so, and was not forced.

    There may be worrying signs on the horizon for Latin America (falling production, exports, etc)

    But for now, I would argue that the region is doing surprisingly better than other parts.

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  8. I have to disagree that Europe is in bigger trouble than the US. The EU has major economic problems, but at least it still has functioning political systems. In the US, the economic problems are just a reflection of a much more major problem, the breakdown of the political system, which is facing a collapse comparable to that of the Soviet Union, if not worse. The 18th century framework has finally broken down, and the federal government is no longer capable of acting in an effective manner. It can go through the motions, but there’s no way it can respond to this crisis. So while the EU countries will eventually be able to deal with and cope with this crisis (except maybe the UK, whose government is even more obsolete than the US’s), in the US the solutions will have to wait for whatever arises to replace the old 18th century system, which could be quite a while.

  9. Eastern Europe (Czech R., Poland, Hungary, Baltics, Balkans..) has the same uniformity as North America (Mexico, USA, Canada).

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  11. Mike’s right, I think. As well, Europe in general, excepting the UK, still has three great assets that the US lacks:
    —a culture of popular protest that is still healthy, and

    —- The institutions of the social safety net that will soon be needed more than ever have been partially dismantled, but still live in popular awareness and in the institutional structure, so they can be reconstituted, I think. And finally,

    —— Slogans or labels as a replacement for thought has not penetrated as far into the popular psyche here as it has in the US. As a result, labeling something— “socialist”, for example, is not automatically the kiss of death.

  12. Color me skeptical. I don’t know, but the arguments presented here don’t seem very solid:
    – no control over the currency: that’s probably the best argument though it should really be restated as ‘not as much control on the currency’. But maybe that’s a good thing, after all the extremely low rates decided by the federal reserve in the last decade are a big part of the problem today.
    – eastern europe and latin america more hit than the rest of world. Really ? Where did you see that ? I’d be curious to see some hard data.

    I personally think the US is in a worse shape than Europe (with the possible exception of the UK) simply because the level of personal debt there is much higher, the US economy also needs more credit to function properly than european economies and last but not least: social safety nets will absorb part of the shock and will auto stabilize the economy.

    Oh and I wouldn’t put too much stock in that reserve currency idea. That may also be a thing of the past.

  13. I meant to say that emerging markets were hit harder than advanced economies, and within emerging markets European banks are highly exposed to Eastern Europe and Latin America. It’s true that emerging markets as a whole have higher projected growth rates than advanced economies, but that’s because they were much higher to begin with. If you look at the difference between the IMF’s November and January forecasts, advanced economy forecasts for 2009 and 2010 are down 1.7 and 0.8 percentage points. Emerging and developing economies overall are down 1.8 and 1.2 percentage points. Within that, as one commenter pointed out, Eastern Europe is doing badly, Latin America relatively well. Projections for Central and Eastern Europe are down 2.6 and 1.3 percentage points, Latin America down 1.4 and 1.0 percentage points.

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