The Euro and Your 401(k)
Like it or not—and many of us don’t like it at all — U.S. taxpayers are helping to bail out Greece and the rest of the financially-distressed euro zone. The International Monetary Fund has committed to providing the Europeans with a financing package totaling about 250 billion euros. The portion provided by American taxpayers, based on our 17.09% share of contributions to the IMF, is now at least $54 billion.
A handful of congressional Republicans steeped in the fiscal conservatism of the Tea Party have been agitating against backdoor U.S. bailouts for several years. In May 2010, for instance, Reps. Mike Pence of Indiana and Cathy McMorris Rodgers of Washington, along with Sen. Jim DeMint of South Carolina, introduced a bill prohibiting the IMF from using U.S. funds for the bailout of any foreign country in Greek-like straits. Similarly, Republicans in June 2009 attempted to block a $100 billion appropriation to the IMF for a $1.1 trillion economic-crisis bailout fund.
President Obama, who had pledged the money during a G-20 meeting that year, had buried the appropriation in a war-funding measure to avoid an up or down vote on the unpopular item. This outraged Minnesota Rep. John Kline, another Republican, who fumed: “I cannot support a bill that uses our military personnel currently in harm’s way to advance a political agenda that includes a $100 billion international bailout that has nothing to do with our troops’ safety or success.” And Kline added: “Already this year, Congress has forced taxpayers to shoulder $700 billion in bailout money, $1 trillion on a so-called stimulus, $410 billion on a massive spending bill larded with pork-barrel projects and $3.6 trillion on a budget that spends too much, taxes too much and borrows too much. We should not tack on an additional $100 billion for an international bailout.”
ISOLATIONISM IS AS AMERICAN as aggressive driving-an unshakable component of our psyche. Unfortunately, nowadays the urge to ignore our global neighbors is about as useful or desirable as the primitive instinct to run with a pack of hunter-gatherers. Even though the euro was launched in January 1999 in part to challenge the dollar’s role as a reserve currency, it makes little sense to hope that the European currency will die.
“If we were in the early 1990s, when the EU was coming into being, then it would be in the competitive interest of the U.S. not to help the Europeans,” says Komal Sri-Kumar, a senior fellow at the Milken Institute as well as chief global strategist for the Trust Co. of the West. “But now that the euro has been in effect for 12 years, and the EU is as big as the U.S. in terms of GDP and a larger trading partner for emerging countries like Brazil and China than the U.S. — if it falls apart it will have major negative consequences for world financial institutions, including U.S. equity markets. So, today, you have no alternative but to help them, in any which way, to have a safe landing.”
The euro’s failure, warns Ryan McConaghy, an economist for Third Way, a progressive think tank, would nudge us back into a recession. “The fact is, the euro’s challenge has come up short, and the dollar is still the world’s reserve currency. The bigger threat to American economic pre-eminence is the type of further turmoil that would result from the failure of Europe.”
Frighteningly, Merkel, Sarkozy, Berlusconi and Papandreou all, to some extent, hold the fate of the economy — and of your 401(k) — in their hands.