How Dependent Is Our Own Economic Recovery on Europe's?

by: The Lonely Economist

Last weekend the G8 summit convened in Lecce, Italy to discuss how they plan to reverse the steps they’ve taken to rescue the world economy.

Among the concerns voiced were that Europe was not doing enough to stimulate their economies and they were not disclosing enough information concerning their own stress tests.

Let’s recall the beginning of this economic crisis through an unconventional example.

Imagine the world as one giant block full of homes. Each house represents a country and on this block, the biggest and most powerful house is the one called The United States of America.

Well, one day the United States discovered one of its beams was falling apart. Finding this odd and unusual, the U.S decided to call in inspectors and have them look over the house.

The news they received was devastating.

According to their inspectors, the house’s entire foundation was built using beams of the worse quality. They advised the U.S to fix their house from the ground up or their house would eventually collapse. Fearing they would lose their precious home, the U.S decided to hire the best contractors available and spend whatever resources they needed to spend in order to reconstruct their home.

Their neighbors were terribly angry when they heard this news because the market value of their homes depended largely on the value of the U.S’s house. Due to the inspectors’ news, the U.S lost a large portion of their own market value, and consequently so did their neighbors.

This problem seemed to be contagious because their neighbor soon began to experience problems with their own beams as well. In order to evaluate the situation, they called their own inspectors.

Their news was similar to that of the U.S’s.

While their problems weren’t as grave as the United States, the inspectors did advise them to address their problems before they got worse. The neighbors readily agreed.

While some neighbors were willing to invest a lot of money to reconstruct their houses, others went about their problems a different way.

Europe decided to replace what was absolutely vital and let everything else go about its course. They didn’t want their well earned money to be spent on what they called “unnecessary fixes.”

Days turned into weeks, weeks into months, and eventually about 2 years passed by.

Now, everything seems to be back on track. The U.S is starting to feel that their house is finally coming along and many of their neighbors feel the same way about their own houses.

They are worried about Europe though.

You see, a couple of days ago they all called back their inspectors to do what they called a “stress test”, which essentially tests the foundation of their respective houses.

Many countries, including the U.S, got reassuring news.

They were told that although their houses weren’t completely redone yet, they were on the right track. This allowed all the homeowners to release a sigh of relief.

To celebrate, they all decided to have a party and discuss their results with one another. When it was Europe’s turn to discuss their results, they decided that their results were not pertinent. The neighbors told Europe that they had a right to know because their results could affect their recoveries.

Europe still said no.

Now, all the neighbors are wondering if Europe’s decision to keep their results private could hamper their own market value rebounds.

If we come back to the real world, we see that this is the question many countries are asking themselves. During the G8 summit, Canadian Finance Minister Jim Flaherty vocalized his frustration with Europe. He said that he didn’t believe Europe wasn’t attacking their economic crisis as strongly as they should. Also, other finance ministers raised concerns over Europe’s refusal to publicize their stress tests. Europe argues that their institutions are too diverse to test under one standard and that by publishing their results they could be harming the recovery.

Could Europe’s decision to do less to fix their economic crisis and their decision to stay silent on their “stress test” results really harm the world’s recovery, but more importantly, our own recovery?

The euro is already down 11% against the pound this year and IMF predicts that may need to write down more than $500 billion over the next year. With problems like these on the horizon, it’s no wonder countries around the world are worried the fragile economic recovery may be in danger.

The U.S has recently reported that consumer confidence is up, jobless claims and foreclosures are down, and the dollar has gained some strength. Russia has said that it has confidence in the dollar and that it will not seek a reserve currency.

We are on a slow track that is finally going in the right direction but Europe’s resistance towards transparency may destroy this delicate road.

Only time will tell.

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