G20 Heads of GovernmentImage by DonkeyHotey via FlickrThe United States struggles with removing a debt ceiling by 2 August while Europe struggles to bail out Greece and save the Euro.
What if both efforts failed?
What if rating agencies downgraded the US debt and extended the downgrading already started by Fitch on Greece's debt to the rest of the ailing European economies, Portugal, Ireland and especially the big ones, Spain and Italy?
A nightmare scenario?
This couldn't be a worse summer, with the two events coming together in time.
How likely is it that this will cause a cataclysmic collapse of the world economy?
I know, you expect me to say this is highly unlikely.
I wish I could say that.
But the truth is, we are saddled on both sides of the Atlantic with an irresponsible class of politicians who either don't understand the challenges they are facing or don't want to understand. All these guys think of is to satisfy their own electorate, people who perhaps voted them in but don't remotely grasp what is going on in the financial world.
German Chancellor Merkel is crucially responsible for the delay of the European response to the threat of a Greek default. From the start of the crisis a year and a half ago, all she was concerned with was how to protect the German taxpayers, in the hope of securing their votes. She never had any vision of Europe and the need to defend the Euro.
The much touted European leaders "debt summit" last week gave birth to a financial mouse. The summit never tackled the problems beyond Greece. Not a word about Portugal, Ireland and worse, Italy and Spain and (maybe) Belgium. My only consolation is that when the Euro collapses, Germany will collapse too.
Big consolation!
And when the US Government closes down its doors because the debt ceiling will not have been lifted in time and it will no longer be able to refinance itself, then the dollar that has (in fact) underpinned the world economy will be gone.
Do you think that an urgent meeting of the G20 will save us, the way it did after the 2008 financial collapse? Of course not, that avenue is closed. The caricatures I posted here are, alas, uncomfortably close to the reality: these people as a group can't do a thing.
Will the Chinese save us? Fat chance ! Just now, they've run into problems of their own, and their economy is slowing down. True, the strength of the emerging economies, especially China, India and Brazil, was both remarkable and unexpected after the 2008 debacle. But don't kid yourself: the miracle can't be repeated.
So what will happen? I don't know. What's needed are politicians with the courage to take decisions their electorate back home might not understand but that would save the world economy - all of us.
Europeans should stop playing around with the Euro and realize that a common currency means common financial, fiscal and social policies. The Euro needs a federal Europe behind it, not just a Central Bank that is limited both by its mandate and by a narrow-minded, conservative president like Trichet. The European Union has to become a reality fast, or the Euro will evaporate.
The logic of a common currency is incontrovertible.
The Euro needs what the dollar has: a Federal Reserve System that runs monetary policy but is also concerned with economic growth and a Treasury with full financial powers. Call it what you will, but what the Europeans have come up with so far, is definitely not it. The rescue fund they've set up - and it won't be fully functioning before 2013 (!) - and the so-called "Marshall Plan" for Greece meant to boost its economy are both laughable.
On Monday the markets will decide how laughable all this is, and I wouldn't be surprised if the Euro plunged and interest on the Greek debt - but also, worryingly, on the Italian debt and Spanish debt - rose again. Sky-high.
Europe is not out of the woods.
And the United States is fast getting into the woods, unless the Republicans stop their Tea Party games and realize how their insistence on defending tax cuts for the wealthy and reducing social security entitlements for the middle classes is putting at risk the (once) almighty dollar.
Can you imagine a world economy without the Euro and the dollar?
I'm keeping my fingers crossed that we won't need to imagine, much less live in such a world!
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