Europeans must not let their “Washington Intervention” go to waste

September 26, 2011

By Mohamed El-Erian
The opinions expressed are his own.

European officials must feel like that they were just on the receiving end of an “intervention” staged by their colleagues from other countries – a process whereby a group of people come together to “shock” a friend/family member into recognizing the depth of a personal crisis and the urgency of embarking on proper corrective actions.

The venue was this past weekend’s Annual Meetings of the IMF and World Bank. This event brings together policymakers from almost 190 countries, along with business leaders and media. It is full of formal meetings, seminars, press conferences, and bilateral discussions.

It is a well-attended gathering that serves many purposes. One of them is to enable policymakers to collectively get a feel for the state of a highly inter-connected and complex global economy. At times in the past, this has proved absolutely critical for designing policy responses that avoided terrible collective outcomes.

This was certainly the case in 2008. On that occasion, a series of consultations and discussions led policymakers from around the world to the startling conclusion that, after the disorderly collapse of Lehman Brothers, the global economy risked tipping into a great depression.

The follow-up was one of the most impressive examples of global policy coordination that culminated in the highly successful G-20 Summit in London in April 2009. The world averted an economic depression that would have spread unemployment, poverty and misery all over the world.

Unfortunately, it did not take long for such coordination to give way to competing and, at times, conflicting national agendas and narratives. This was particularly true in America and Europe where policymakers failed to understand and act on consequential global and national realignments.

Today the global economy is highly vulnerable to major dislocations on account of  three distinct but mutually reinforcing problems: a sovereign debt crisis (whose epicenter is in Europe), banking system fragilities (Europe), and an inability to grow robustly (America and Europe).

As Europe features in all three, it should come as no surprise that European officials were approached by lots of people this weekend in Washington. Many wanted to understand what the European policymakers had in mind; and they wished to ring a very loud alarm that would spur these officials into bold and decisive action.

Wherever they turned, European officials heard a consistent message which typically consisted of four specific points:

•       The bickering and dithering of European politicians and policymakers have allowed the crisis that originated in Greece to spread too far and wide;

•       The crisis is has now gotten close — far too close — to being uncontrollable;

•       Virtually no country in the world would be immune from the adverse consequences; and, therefore,

•       Europe needs to finally step up with decisive policies that are underpinned by a common political vision of what the Eurozone should look like in five years time.

Initially, the reactions of most Europeans ran the gambit: from denying the severity of the crisis to diverting the blame elsewhere. Some hit back, noting that they were neither blind nor deaf. By the end of the meeting, however, most seem to have heard the messages, taken them to heart, and indicated their intention to act on them.

Recognition and proper diagnosis are essential components of a durable solution to a problem. It is therefore good news for the global economy that, especially after this weekend, there is little doubt in the mind of Europeans about the urgency of their situation. They also know that the world is watching and hoping.

It is also good news that some key officials even went so far as to identify a timetable for action – the six-week run-up to the next G-20 meeting in France. True, it is a timetable that is excessively influenced by political considerations rather than economic and financial ones. As such, it may be challenged by markets that are unsettled by fragilities in both sovereign debt and banking systems.

So, will this Washington intervention and timetable hold? The answer depends on five key issues:

First, the Europeans must take immediate — and I stress immediate — actions to stabilize the banking system and counter more effectively the persistent recent rise in yields on government debt issued by Italy and Spain in particular. This cannot wait six weeks.

Second, they must quickly come up with operational mechanisms that build secure firewalls around at least one highly troubled country (Greece) so that it can default without triggering a tsunami for others in the Eurozone.

This will only be possible if, and this is the third point, the European Central Bank (which has been carrying most of the burden so far) receives much more support from national fiscal and regulatory authorities.

Fourth, bold structural decisions must be taken to strengthen the architecture and functioning of what, in the final analysis, is likely to be a smaller, less imperfect and stronger Eurozone.

Finally, politicians must secure the airspace for the technocrats that are waging difficult day-to-day battles through better communication, a common vision and a unified purpose.

This is quite a list, and there is very little time to waste.


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Well, by reports late today (Monday, 9/27) the Europeans are considering putting together a ‘leveraged vehicle’ solution to stop sovereign debt contagion. This so-called solution is laced with even greater and more dangerous debt – leveraged debt.

In my opinion it is an effort to very deceptively offload responsibility and risk onto unsuspecting investors for a rescue of the financial system. I know, I know – you either have to offload it onto taxpayers or else onto investors. But this scheme looks distinctly ‘Ponzi’ to me, and to many others.

In my opinion it will actually facilitate and accelerate the turning of sovereign debt into toxic assets. It will only help to ‘tar and feather’ sovereign debt. So be it. Let’s get on with the inevitable process.

Posted by NukerDoggie | Report as abusive

If you know Europeans, you also know that they never stop bickering among themselves. The most important voice to be heard will be from Berlin. Let us hope that their sense of Realpolitik will overcome their aversion to help those prodigal Mediterranean countries.

Posted by blackjack5 | Report as abusive

It’s unfair to characterise this European debt crisis as being caused and exacerbated mostly by the failure of European politicians to _recognise_ the problem. The real issue has not been a complete lack of vision; but rather, differing visions of how to resolve the crisis.

From what I am led to believe:
Germany wants investors to take some responsibility for their investment decisions. France wants to protect French banks from taking a hit.
Germany wants a common market for their exports without the trappings of a European superstate to redistribute German wealth around Europe. France recognises the essential duality between monetary and fiscal union.
I might have over-simplified this but there are fundamental conflicts of vision. It’s not as though politicians haven’t seen the news reports and raw statistics telling the story of how ordinary Greek people are suffering through no fault of their own.

This “European crisis” looks remarkably similar (on a political level) to what’s happening in the American debt crisis, does it not? Two factions fighting over varying ideological visions of how to deal with a fundamental financial crisis that requires both short-term and long-term solutions…

One wonders then why Timothy Geithner, who didn’t have the skills to even approach a bipartisan political settlement in the USA (instead of dealing eye-to-eye like a real man and arguing his case properly like they would in the old days, he was pleading from his knees essentially for someone to save his own reputation), instead of resolving his own country’s problems before lecturing other countries, Geithner feels entitled to visit Europe and lecture Europeans on a crisis that is by raw numerical accounts smaller than the problem you have in the USA (at least, if you average European problems across Europe, and American problems across America).
Is it because he wants to reinvigorate his political standing back home? Perhaps the real reason Geithner took this holiday from Washington politics was to divert public attention from the ongoing problems in the U.S. financial system. The more people talk of a “European” debt crisis, the more time it buys the USA to resolve their own.
Plus, Geithner wasn’t going to take his holiday from Washington over in China again, was he, where he got [justifiably] laughed at by their economics students after his glib proclamation that Chinese investments in dollar-denominated assets are totally safe?

Don’t worry guys, it’s underwritten by Uncle Sam… If the Euro was the dominant worldwide reserve currency, would Europe be able to “print its way out of debt” like the Federal Reserve promises to do? Would the boot not be on the other foot???

If China is willing to back its currency with gold (as the USA unfaithfully promised to do at the Bretton Woods negotiations where world powers decided to allow the USD to become the global reserve currency), then I don’t see any reason why the CNY shouldn’t become the worldwide reserve currency. Do you?

It’s about time for you Americans to get your house in order. There’s no alternative but to straighten out your fiscal budget. Casting doubt on the health of other people’s economic situations to make yourselves look comparatively stable, will not buy you much time.

Posted by matthewslyman | Report as abusive


Perhaps Geithner went to Europe because the situation is dire.

While you can liken the American debt problem to that of Europe, the competing ideologies are not the same.

China is fraught with issues of its own – there is a reason China continues to purchase US debt in dizzying quantities.

Step off your high horse and take a look at what is really going on in the world; You may find that you don’t have everyhting figured out, as you seem to imagine.

Posted by jaham | Report as abusive

@jaham; specifically in reply to your remarks:

> “Perhaps Geithner went to Europe because the situation is dire.”

The situation is indeed dire, and has been dire for some time now. It’s just strange that Timothy Geithner chose to visit Europe and lecture Europeans just before such a major deadline on his own work schedule at home. Why did Timothy Geithner leave America when the Senate still hadn’t agreed on the American debt/budget plan? If he was serious about doing his own job properly, he’d have been busy in America helping the politicians form a genuine consensus until he was sure he could go to Europe offering some fresh and credible know-how. Consider also how the debt crisis started in the USA, and furthermore that fully predictable U.S. regulatory failures have been responsible for the vast majority of the losses globally.

By travelling to Europe at the very point in time when he did, Geithner was perhaps trying to set the agenda for the news journalists and bloggers to divert attention from what the Federal Reserve knew would be an embarrassing and potentially damaging situation.

On the other hand, I doubt that Timothy Geithner could have visited Europe in such a public way without being invited or welcomed by the Europeans. So perhaps the Europeans also wanted him there as a fresh face to make it appear to the market as though something different was happening this time around.

So perhaps the timing of Geithner’s visit was politically convenient for both European and American governments.

We should have no doubt however that the timing was more political than practical. I don’t discredit Timothy Geithner for taking a political approach for an economic problem (much of economics is psychological and political after all); it’s just that I don’t see him doing nearly so well on the fundamentals of securing economic agreement between the various ideological factions, or securing consent for the difficult things that must be done.

Until Obama or Geithner gets the warring parties to tone down the rhetoric, fix the fundamentals and present a credible common vision, Geithner’s politically motivated international trips will be like sticking a band-aid on a near-range shotgun wound; because whether you look at the American or European problems, they’re too big for any individual ideology or party to fix. He’s wasting his time, and will be laughed at by yet more well-briefed undergraduate students before his time is up, unless he changes his tack to pay more attention to the fundamentals.

What do I mean by all of this? For contrast, here is an American economist I trust and respect: world-banks-zoellick-the-world-is-in-a-d  ?videoId=221847491

This is the closest thing I’ve heard to real VISION for years. This man needs our sincere support.

> “While you can liken the American debt problem to that of Europe, the competing ideologies are not the same.”

There are indeed numerous differences in the details (a fact I implicitly admit in my original post). My point was a general one: simply, political point-scoring is holding back both America and Europe from reaching real (not merely cosmetic) agreement on a strategic way forward, and in actual fact, America’s debts (and your necessary readjustments in private lifestyle) are (generally speaking, on average) bigger than Europe’s.

If you want to discuss the specific ideological sticking points that are preventing the politicians from doing their jobs properly, that’s a separate discussion; only, I think that most people will agree that the job of politicians is to form a sensible consensus so that everyone can go forward together. On this measure, American and European politicians are mostly failing.

> “China is fraught with issues of its own – there is a reason China continues to purchase US debt in dizzying quantities.”

True. But China’s reasons for continuing to purchase U.S. debt might not include economic fundamentals; they might be “motivated” by a need to protect their holdings of dollar-denominated reserves, at least until the present crisis is over. There’s a reason why those Chinese economics students all laughed Timothy Geithner out of town. Is it not because they all know that the Emperor is wearing no real clothes?

Posted by matthewslyman | Report as abusive

@Reuters moderators/ MohamedElArian: technical tip: the URL of this article (which includes quotation marks) appears to be playing tricks with your website on a technical level. Try pasting the URL into a web browser. Refresh the page, and see whether or not the comments are displayed at the bottom. Try this in several major browsers. I think the speech marks are a slight problem. (You might want to delete this remark once this is noted.)

Posted by matthewslyman | Report as abusive

p.s. Here’s another article that helps explain why the Chinese are still purchasing U.S. debt: 896

Continuing to purchase American debt at irrational rates of interest is basically a form of currency manipulation (a variety of economic warfare) that works especially well against democracies that can easily become addicted to the economic appeasement of the electorate.

America, like Europe, needs vision.

Posted by matthewslyman | Report as abusive

@jaham: finally on your last point.

> “You may find that you don’t have everyhting figured out, as you seem to imagine.”

Clearly. I’m still learning like the rest of us, and I’m very often wrong about economics. In demonstration of this last point:
The BBC article I quoted last actually contradicts some of the stuff I suggested earlier. Clearly, the Chinese are NOT going to be willing to take up the mantle of the Gold Standard in order to turn the Yuan into a worldwide reserve currency; because they appear to actually understand competitive economics.
Final point. Here’s another excellent article I originally found cited on a Reuters blog: ml?res=9E05E0DE1131F931A15751C1A9609C8B6 3

When you combine the outlook from this article with the image of competitive economics painted by the BBC article (cited in previous comment), it does not bode well for world economics over the next several years (perhaps even the next half-decade.) The current ills of the American and European systems are only microcosms or reflections of much larger fault-lines that currently stretch across global economics. The BRICs of this world have now time for fair play (but then, nor do the world’s industrialised nations). The Chinese government’s drug-pushing behaviour of “buying” Western debt whilst competitively depressing their own currency, has gone unpunished for too long. Washington’s Chinese political sponsors are now “too big to fail”. Every new American politician promises to punish Chinese currency manipulation with import tariffs and then succumbs to political realities once in office. As we have seen with gasoline, the Americans will revolt at the first signs that their treasured living standards are being eroded.
Americans and Europeans will need to be re-educated with the pragmatic work-ethic that made Europe great first and then America, and which is now making China great. We need pragmatic and patriotic education. Ultimately, the global imbalances may only be fixed once everyone (including the BRICs) have suffered enough economic pain to create the political will for consensus. We’ll get educated on economics, either the easy way or the hard way…

So I shan’t be surprised if this 1998 prediction about the 2008 crisis turns out to be right: 0/to-the-boys-and-to-the-men?lang=eng

Bye now, really. If anyone else criticises me or my ideas on this thread, I’m fair game – I’ll make no more comments on this article.

Posted by matthewslyman | Report as abusive