20 February 2012. PenzaNews. For the first time in the 60 years of its history the European integration project is facing a very serious existential crisis, and though the probability that the eurozone will fall apart is low, the issue is how Europe will be able to evolve further. This is the opinion expressed by Edwin Truman, a senior fellow of the Peterson Institute for International Economics in Washington, D.C., when analyzing Europe’s failure to manage the crisis effectively and decisively.

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His position reflects the grim outlook shared by Europe’s partners on the other side of the Atlantic who have long feared the negative impact of a deepening euro crisis on the U.S. economy. In September 2011 President Barack Obama warned about the dangers of the ongoing European crisis to the world stating that the Europeans who had not fully recovered from the 2007 crisis and never fully dealt with the challenges in their banking system had to take responsible actions more quickly.

Douglas Elliott, a fellow of the Initiative on Business and Public Policy of the Brookings Institution, explains that the Americans are concerned about the crisis in Europe because of their high exposure to the eurozone and Europe’s impact on the U.S. economic relations with the rest of the world.

“Why is Europe so important for us? We export about $400 billion annually to Europe, own $1 trillion of direct investments over there, and our banks have roughly $5 trillion of credit exposure to Europeans, not to mention additional exposures that exist for our insurance, pension, and mutual funds. Europe is also one of the biggest economies in an era of globalization, meaning a recession there will slow growth in our other trading partners, including in Asia. We will earn less from exports to, and investments in, the rest of the world because the European economy shrinks,” noted the expert.

According to Edwin Truman, the failure of European leaders to address the problems within the eurozone has already inflicted $1 trillion in real economic costs on the world economy.

However, there are also internal political reasons for America’s interest in having Europe resolve its crisis as soon as possible. As Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, D.C. believes, Obama’s re-election chances this year largely depend on how American voters will view his contribution to economic recovery at home.

“President Obama’s political fate could very likely be determined in Europe. That is the source of the biggest threat to the U.S. economy — and indeed the world economy, which has already slowed significantly due to the financial crisis in Europe. The eurozone is already in recession, and the European authorities — the European Central Bank, the European Commission, and the International Monetary Fund — are adopting policies that will almost certainly make it worse. But the big threat from Europe is not the recession itself, but the possibility of a Lehman Brothers-type financial meltdown. This is a risk that the European authorities are taking as they use, and unnecessarily prolong, the crisis in order to force certain “reforms” on the weaker eurozone economies such as Italy and Spain. The latter are “too big to fail,” in terms of the size of their debts. And then there is Greece, where the European authorities, together with the private creditors, are pushing the country to the brink of a chaotic default,” Mark Weisbrot stated.

As the IMF notes in its Global Financial Stability Report released in late January 2012, the U.S. economy is susceptible to a range of shocks from the eurozone crisis, including attacks on the financial sector such as direct exposures of American banks to eurozone banks, or the sale of U.S. assets by European banks. Last year the U.S. Congressional Research Service estimated U.S. bank exposure (not including the exposure of non-bank financial institutions and exposure through secondary channels) to the eurozone debt crisis at $640 billion.

The fact that Barack Obama talks to Angela Merkel at least once a week about the crisis, Under Secretary of the U.S. Treasury for International Affairs Lael Brainard has been to Europe 17 times in the last two years, and Treasury Secretary Timothy Geithner has also made a number of trips to Europe indicates America’s deep concern about the escalating euro crisis.

Meanwhile, Fabian Zuleeg, Chief Economist and Head of Europe's Political Economy programme of the European Policy Centre, said in an interview with news agency PenzaNews that the influence of the United States on the European economy is relatively limited.

“There is, of course, a very real interest for the United States to ensure that the eurozone crisis does not become a global crisis. This implies coordinated action in areas such as bank liquidity is necessary and desirable for both the United States and the EU. But the reality is that the U.S. economy is not in a state where it can help others significantly, especially since there is also a debt problem in the U.S. The mortgage and banking crisis had its origin in America and, while the European banks were equally involved in providing unsustainable credit, it means that banking sectors on both sides of the Atlantic continue to be weak,” the expert noted.

In addition, substantial differences in approaches to crisis management prevent the United States and Europe from coordinating their efforts in this area. Thus European observers reacted with skepticism to the statements made by Barack Obama and U.S. Treasury Secretary Timothy Geithner suggesting ways out of the crisis.

For example, the German financial daily Handelsblatt pointed out that Barack Obama had failed to make the same methods work to better economic conditions in the United States.

“Money is supposed to save Europe — quickly and in the largest quantities possible. U.S. Secretary of Treasury Timothy Geithner has been trying for more than two-and-a-half years to suffocate his crisis with money. But aside from the lack of success, the collateral damage is immense. It manifests itself in a loss of government credibility, a loss of trust in the currency and the paralysis of any sort of dynamism — because the crushing debt mountain is robbing the famously optimistic Americans of their confidence,” the daily wrote at the time.

Director of the Berthold Beitz Center for Russia, Ukraine, Belarus and Central Asia of the German Council on Foreign Relations Alexander Rahr suggested that the disagreement between the United States and Europe is mainly about methods proposed by the parties for dealing with the crisis.

“There is a harsh confrontation between America and Europe with the Americans demanding that the Europeans act just like they themselves do, i.e. by printing money, stimulating money growth and fostering various economic programs for increased money supply so that people are able to consume more, thus supporting economic growth in their countries. This is what America does. But Europe has a different mentality. The Europeans view in awe the huge mountains of debt that they have already accumulated and will have to repay somehow in the next few decades as they see that it is practically impossible. Europe does not want to increase this burden even further just because of its psyche. The Americans easily accumulate debt then quickly get rid of it using different tricks and manipulations in world politics but they have a different economy and a different standing in the world. Europe will find it much harder to repay its debt because its people have enormous social needs. This is why it does not wish to follow in America’s footsteps, which irritates the Americans who really want Europe to show growth and have money so that the Europeans could buy American goods that they no longer buy now. This is what the political conflict between America and Europe is really all about, but it does not extend further,” the expert explained.

In turn, Sebastian Dullien, Senior Policy Fellow at the European Council on Foreign Relations, recounts that the origins of the current euro crisis are found in the 2008-2009 global financial crisis caused by the U.S. financial meltdown when the drop in revenue put the public finances of many eurozone countries into a precarious position. In his opinion, the United States has not played a large role in the euro crisis with Geithner’s demands that the European countries act swiftly and decisively having little impact on policies in the euro area.

Nevertheless, some analysts see reasons to believe that Europe is gradually adopting the methods so commonly used by its North American partner. As Mark Weisbrot noted, there has been some change of course since December 2011, when the ECB poured $638 billion into the private banking system to head off a liquidity crisis. In his opinion, the ECB has tried to create a firewall by throwing cheap money at commercial banks to ensure there would be no repeat of what happened after the collapse of Lehman Brothers in 2008.

In his assessment of the current situation of the eurozone Kemal Derviş, a former minister of economics in Turkey, administrator of the United Nations Development Program (UNDP), and vice president of the World Bank, observed that the eurozone crisis would continue well into 2012, despite early February’s recovery in stock markets.

“Negotiations between Greece and the banks over Greek sovereign debt may yet be concluded, but sufficiently wide participation by banks in the deal remains very much in doubt. Meanwhile, the International Monetary Fund has raised the issue of official-sector debt reduction, possibly even by the European Central Bank, sending the message that a “haircut” for private bondholders will not be enough to return Greece to financial sustainability,” the expert noted.

He also considers growth prospects for the eurozone to be “simply too discouraging” despite the latest measures taken by the ECB including the provision of liquidity to European banks at 1% interest for up to three years. In his opinion, there is just too much long-term uncertainty, which is evidenced by Standard & Poor’s downgrading of France and Austria in addition to seven other eurozone countries (Slovenia, Slovakia, Spain, Malta, Italy, Cyprus, and Portugal) in mid-January 2012.

Most experts agree that the probability of Europe’s deciding to abandon the euro is very low. One of the options is for Greece to leave the eurozone and start dealing with its economic and political problems on its own. However, some observers think that there is a high risk that the situation could get out of hand with a catastrophic exit of one country triggering a negative chain reaction.

Alexander Rahr believes that the disintegration of the eurozone would be a disaster for Europe and would signal a return to the time when each country had its own economy and no single market existed.

“The end of the euro is the end of the single internal market in the EU because prices for products would soar in different countries and customs and currency barriers would be introduced. Currencies would have to be exchanged at the borders which would cost money. Everything would be more expensive with Europe losing competitiveness in the global economy. Why was all this done? So that Europe could create a market comprising half a billion people with joint consumption and a single currency and capable of competing with other emerging centers of power. Europe understands that this is a very serious issue. Therefore I think that Greece can be forced out of the eurozone, but Europe will not suffer great damage because Greece contributes less than 2% to Europe’s economy. But everything will be done to prevent the exit of Italy from the eurozone. The exit of other EU members would mean the failure of the entire model of European integration as it has developed in the past 60 years,” he noted.

Meanwhile, Europe is now asking other countries for a substantial increase in financial assistance via the IMF to help erect a European financial safety net. In particular, in a speech in Berlin on January 23, IMF Managing Director Christine Lagarde said that Europe needs stronger growth, larger firewalls, and deeper integration, but added that other economies also have an important role to play to restore balanced global growth. As for the multilateral component, Lagarde said that the IMF was ready to help and was seeking to increase its lending resources by up to $500 billion.

Japan and China already stated that they would deal with any formal request from the IMF for extra funds jointly. The U.S. leaders have so far been reluctant to endorse this request.

As was reported earlier, the euro crisis began in late 2009 in Greece and spread to Ireland and Portugal. It now threatens Italy and Spain as well as the entire euro area economy and, consequently, the pace of economic growth of the rest of the world. The European Union and euro area leaders and institutions have failed for more than two years to contain the euro crisis.