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.