The European Union Crack Up And What It Says About U S Priorities

It is becoming ever clearer that the macroeconomic experiment know as the European Union is coming apart.

May 15 (Bloomberg) — The euro fell to its lowest level since the collapse of Lehman Brothers Holdings Inc. on concern that the 16-nation currency may be headed for disintegration.

The shared currency fell for a fourth week versus the dollar and a third week versus the yen, the longest losing streaks since February, as German Chancellor Angela Merkel said that Europe is in a “very, very serious situation” despite a rescue package for the region’s most indebted nations. European Central Bank Governing Council member Axel Weber speaks on financial-market regulation next week in Berlin.

Via Joe Weisenthal some of the most high profile bond fund managers in the world have dumped their holdings in Greek and Portuguese debt this week.

The euro has tumbled to its lowest level in 18 months and might be entering a period of sustained weakness, analysts believe, on fears of years of weak economic growth as austerity measures across the continent bite.

Deterioration in sentiment towards the euro has raised concerns that its appeal as a reserve currency, a major support for it in recent years, is diminishing.

“We think it is too risky to buy Greece and Portugal,” said the head of one of the largest US asset managers.

When there is default risk, you scale your exposure differently. There is no value. But even if there was value, our investors still don’t want us to invest.”

What will happen in Europe if the EU falls apart and the weaker economies are decoupled from the stronger (or less weak) economies? If Portugal, Spain and Greece default on their debt what will happen? I suppose the best answer to that question is another question: what will be the response of the parties that hold their debt. It’s beginning to look a lot like the European Central Bank will be left holding the bag, so who takes the hit in that scenario? Probably Germany, France and the UK, who have the biggest stakes at risk in this looming catastrophe. Will those countries, in a worst case scenario, allow their already struggling economies to be severely harmed by the failure of the weaker EU members? Or will France, Germany and the UK force budget cuts and austerity measures on the weaker sisters? And equally important, will the weaker sisters accept these mandated cutbacks? Those riots in Greece we saw this week indicate that at a minimum a few won’t accept EU budget mandates.

Any student of history knows that wars have been started in Europe over lesser financial panics than what we are witnessing today in the EU. There is a sense of uneasiness that is permeating all international financial markets now because seasoned investors and students of history know that one country, the United States, has a long history of lending to Europe to avert financial crises and war. This is where Junius Morgan and his son, J. Pierpont Morgan, made their international reputations. But that was before the existence of the Federal Reserve Bank of the United States. One theory that deserves consideration is that some international investors clearly anticipate a crisis of monumental proportions but are concerned that the lender of last resort (the United States) may be somewhat preoccupied (to put it politely) and unprepared to address an international financial panic. American voters, for example, may be more distressed about the prospects of having to bail out the eighth largest economy in world – California – and less concerned about old Europe.

The anxiety over the EU crack up may be more the result of concern that the lender of last resort, the United States, is getting ready to let one of its own states go belly up first. This is why the Tea Party movement, which first highlighted this particular element of the Washington spending binge last year, is the object of such criticism from the media organs that cover international finance. It’s all about which interested party gets a place at the Federal Reserve and the U S Treasury table. Will it be Greece and Portugal or the victims of their demise – France, Germany and Britain? Or will it be California? Or will voters in the U S put their foot down and say enough to the absurd concept of bailing out a debtor with more debt, regardless of nationality or if they are evn members of the union?

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